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O'CONNOR v. INSURANCE CO. OF NORTH AMERICA

October 21, 1985

PHILIP O'CONNOR, DIRECTOR OF INSURANCE FOR THE STATE OF ILLINOIS AS LIQUIDATOR OF RESERVE INSURANCE COMPANY, PLAINTIFF,
v.
INSURANCE COMPANY OF NORTH AMERICA, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Plunkett, District Judge.

MEMORANDUM OPINION AND ORDER

Plaintiff, Philip R. O'Connor (the "Liquidator"), brings this diversity action on behalf of Reserve Insurance Company ("Reserve"). Reserve has been found insolvent, pursuant to the provisions of the Illinois Insurance Code ("Insurance Code") and the Final Order of Liquidation entered by the Circuit Court of Cook County in People ex rel. Mathias v. Reserve Insurance Co., 79 Ch 2828. Defendants include twenty-six insurance companies which acted as reinsurers of Reserve's liability under various reinsurance contracts (sometimes referred to as the "Reinsurers"); American Reserve Insurance Brokers International, Inc. ("ARIB"), which served as the manager under the contracts prior to Reserve's liquidation and shortly thereafter; Montgomery and Collins, Inc. of Texas ("Montgomery"), which purchased ARIB's rights as manager of the contracts after entry of Reserve's order of liquidation; and Petroleum Insurance, Inc. ("Petroleum"), an affiliate of Montgomery, which obtained from Montgomery the right to serve as manager under the contracts.

Presently before the court are the parties' cross-motions for partial summary judgment. For purposes of their motions, all Defendants have adopted, pursuant to the court's request, the argument set forth in the memorandum and the statement of facts and exhibits filed by the Insurance Company of North America, and certain other Defendants.

The court will grant a motion for summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. Rule 56(c). For the reasons stated below, Defendants' motions for partial summary judgment are granted, and, accordingly, the Liquidator's cross-motion is denied.

Factual Background

The relevant facts as we understand them, although complex, do not appear to be in dispute. On May 29, 1979, an order of liquidation was entered by the Circuit Court of Cook County, naming the Director of Insurance of the State of Illinois the Liquidator of Reserve. The Liquidator has title to Reserve's property and is authorized to deal with the property and business of the company.

For several years prior to the entry of the liquidation order, Reserve was a party to several reinsurance contracts which shared insured property risks in the petroleum and petrochemical industries. In June 1975, Reserve entered into a "Quota Share Contract of Reinsurance" (the "3100 Treaty") with certain reinsurers whereby a portion of the risk on petroleum and petrochemical insurance policies written by Reserve would be carried by the reinsurers. In July 1976, Reserve entered into a "First Surplus Reinsurance Agreement" (the "3200 Treaty") which established a reinsurance arrangement for risks written above a certain dollar amount under the 3100 Treaty. ARIB acted as the manager under both the 3100 and the 3200 treaties.

Effective January 1, 1979, the 3100 and 3200 reinsurance contracts were replaced by a new contract of reinsurance between various reinsurers, with ARIB as the manager (the "3400 pool"). Reserve was a party to the 3400 pool both as a reinsurer of risks undertaken by other insurance companies and as a reinsured on its own risks. By an agreement dated June 25, 1979, Montgomery purchased ARIB's interest as manager under the reinsurance contracts, and thereafter Petroleum became the new manager under the agreements. (The Liquidator refers to the three companies collectively as the "Manager").

While a participant in the reinsurance pool, Reserve wrote many insurance policies covering property risks in the petroleum and petrochemical industries and ceded to the reinsurers under the 3100, 3200, and 3400 treaties their share of the risk insured by such policies. Reserve also accepted reinsurance risks on policies written by other insurance companies which were members of the pool. The reinsurance pool was governed by a written contract and operated as follows. ARIB collected the insurance premium from the policyholder. ARIB then used approximately 30% of the premium to pay commissions to the producing agent or broker and the ceding company. ARIB retained the remaining 70% which was credited to the ceding company and the reinsurers in proportion to their assumption of the risk. As losses were incurred, ARIB paid the loss payments to claimants out of those retained funds.

Each quarter ARIB provided the reinsurers with an accounting of net written premiums, losses, loss adjustment expenses, salvage, etc. If the net written premiums plus salvage recovered exceeded losses and expenses, ARIB paid out the net amount to the pool participants. If losses and expenses exceeded the net written premiums and salvage recoveries, the participants paid the difference to ARIB as manager. Defendants claim, and the Liquidator does not dispute, that from January 1, 1979 to the date of Reserve's insolvency the losses exceeded the net premiums in the pool and Reserve failed to make the necessary payments during that period.

Sometime after January 1, 1979, ARIB ceased issuing Reserve policies. The Liquidator contends that in April and May 1979, ARIB cancelled a large number of Reserve's policies because ARIB was concerned about Reserve's failing financial condition. During that time, ARIB issued new policies in the name of one of the other ceding companies. The Liquidator asserts that this cancellation and rewriting of policies, prior to Reserve's insolvency, was unauthorized and unlawful.

On the basis of the foregoing facts, the Liquidator alleges that he is entitled to recover, among other things, (1) certain reinsurance proceeds for losses incurred by Reserve's policyholders prior to liquidation but not paid as of the date of the liquidation order (Count 1); (2) certain monies which the reinsurers and the manager owe Reserve for claims of policyholders which ARIB paid with Reserve's funds prior to liquidation (Count II); (3) Reserve's proportionate share of premiums written (less losses and other expenses) which Reserve earned under the 3400 reinsurance agreement (Count III); (4) the unearned premiums which the Manager or the reinsurers are holding and which relate to Reserve policies which were cancelled on May 30, 1979 as a result of Reserve's insolvency (Count IV); (5) the unearned premiums on Reserve policies to which the Liquidator would have been entitled had the Manager not cancelled such polices during the months prior to the liquidation order (Count V); and (6) the unearned commissions on policies cancelled by the liquidation order and cancelled by ARIB, allegedly without authority, during the months prior to the liquidation order (Count VI).

Defendants' motions for partial summary judgment request, pursuant to Fed.R.Civ.P. Rules 12(b)(6) and 56: (1) a declaration that the amounts, if any, that the Liquidator may ultimately be entitled to receive under Counts I-IV are to be reduced by the debts of Reserve to the Reinsurers and other Defendants, to the extent the amount of those debts may ultimately be proven;*fn1 and (2) an order dismissing Count V of the complaint (and Count VI to the extent it seeks unearned ceding commissions on insurance policies claimed to have been wrongfully cancelled pursuant to the theory of Count V) for failure to state a claim upon which relief can be granted.

The Liquidator's cross-motion moves the court, pursuant to Fed.R.Civ.P. Rule 56, for partial summary judgment: (1) adjudging and declaring that the amounts the Liquidator is entitled to recover from Defendants may not be reduced by Reserve's debts, or, in the alternative, adjudging and declaring that the amounts the Liquidator is entitled to recover under Counts I, IV, V, VI, and VIII of the complaint may not be reduced by Reserve's debts; (2) adjudging and declaring that Defendants' "mass cancellations" of Reserve policies prior to May 29, 1979 were unauthorized and wrongful or resulted in a voidable preference; and (3) adjudging and declaring that the Liquidator is entitled to recover from Defendants under Counts V and VI of the complaint. We address each of the issues in turn.

I. Set-Offs

Defendants contend that they are entitled to reduce the amount of any debt they may owe the Liquidator by debts Reserve owes to Defendants under the reinsurance agreements.*fn2 The Liquidator opposes Defendant's motions, arguing (1) that Defendants may not assert their set-off claim in this forum, but only in the liquidation court pursuant to provisions of the Insurance Code and the liquidation order, and (2) that even if Defendants' set-off claims may be considered by this court, certain of those claims do not meet the requirements set out in the statute. See Ill.Rev.Stat. ch. 73, § 818 (1983).

1. The jurisdiction issue

The heart of the Liquidator's argument is that the Insurance Code provides an exclusive procedure for the filing and determination of claims against an insolvent insurer, and that this procedure encompasses the assertion of set-offs. Furthermore, it is the Liquidator's position that the injunctions contained in the liquidation order pursuant to Ill.Rev.Stat. ch. 73, § 801 (1983) present a bar to Defendants' set-offs in this forum.*fn3 Thus, the Liquidator argues, Defendants' set-offs must be brought in the liquidation ...


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