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In re Liquidation of Inter-American Insurance Co.

February 02, 1999


Appeal from the Circuit Court of Cook County No. 91 CH 10189 The Honorable Ronald C. Riley, Judge Presiding

The opinion of the court was delivered by: Justice Cousins

Appellant Alabama Reassurance Company (Alabama Re) had reinsurance contracts with a now-insolvent life insurance provider, Inter-American Insurance Company of Illinois (Inter-American). The contracts had broad arbitration clauses. Alabama Re disputes its alleged obligation to pay Inter-American's living policyholders the present net value of their policies. The liquidation court rejected Alabama Re's defense that it was not obligated under the contracts because they were executory and Inter-American's estate had rejected them. Alabama Re moved to compel arbitration of its remaining defenses. The court granted Alabama Re's motion, except as to the executory contract issue and a contract defense. Alabama Re appeals, contending that the trial court erred in excluding the contract defense from arbitration. The liquidator of Inter-American cross-appeals, contending that by contesting its ultimate liability in court Alabama Re has completely waived arbitration. The liquidator also claims that the trial court erred in refusing to order the arbitration panel to set forth the reason for its decision in writing.

We affirm in part and reverse in part.


This case concerns the estate of Inter-American, an insolvent life insurance company domiciled in this state. Inter-American was ordered into liquidation on December 23, 1991, pursuant to the Illinois Insurance Code. 215 ILCS 5/1 et seq. (West 1994). The court appointed the Illinois Director of Insurance as liquidator and ruled that the liquidator was vested with all rights and funds recoverable under Inter-American's outstanding contracts.

Among these contracts were reinsurance treaties with a total value of over $60 million. Reinsurance contracts provide that an insurance company will cede a share of the premiums from its policies to another company (the reinsurer) and that the reinsurer will assume a proportional obligation to pay any claims from the policies. See generally 1 L. Russ & T. Segalle, Couch on Insurance ch. 9 (3d ed. 1997). Two of Inter-American's reinsurance contracts were with Alabama Re, the appellant in this action. Alabama Re's contracts contained broad arbitration clauses.

The dispute between the parties centers on a certain class of Inter-American's policyholders: those who had policies that were reinsured by Alabama Re and who were still alive when Inter-American went into liquidation. In the jargon of this case, these persons are referred to as "policyholder Cs." The liquidator contends that the reinsurance contracts obligate Alabama Re to provide funds to compensate these policyholders for the value of the life insurance policies that they are losing. Alabama Re maintains that it is not so obligated.

One of the primary issues in the case thus far has been whether the reinsurance contracts were "executory." According to a widely accepted definition, a contract is executory if the "obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance to the other." V. Countryman, Executory Contracts in Bankruptcy, Part I, 57 Minn. L. Rev. 439, 460 (1973). Had the contracts been executory, the liquidator would have been required to elect between accepting or rejecting them. See Collier on Bankruptcy §70.43 (14th ed. 1978). Alabama Re argued that the liquidator implicitly rejected the contracts by failing to pay premiums on the policies and that, accordingly, the reinsurers were released from their obligations under them.

The question first came before the liquidation court when the liquidator petitioned for an order finding that the reinsurance contracts were not executory. Alabama Re intervened, along with Employers Reassurance Company (ERAC), the other reinsurance company that refused to settle, moving for a declaratory judgment that the contracts were executory and, thus, the reinsurance providers were not obligated under them.

The liquidator made a cross-motion for a declaratory judgment, once again requesting a finding that the contracts were not executory. The liquidator's position was that, although Inter-American had had an obligation before bankruptcy to continue to pay premiums on behalf of the policyholder C class, because of the statutorily mandated insolvency clause in the contract, once Inter-American became insolvent, its failure to pay those premiums would not excuse performance on the part of the reinsurance companies. Thus, the liquidator reasoned, the contracts did not fit under the definition of executory.

Before this dispute was resolved, Judge Hofert, who had been overseeing the case up to that point, retired. He was replaced by Judge McBride. After hearing arguments, Judge McBride granted the liquidator's motion and denied Alabama Re's motion. Judge McBride's oral ruling on the cross-motions for declaratory relief reads: "[O]n the last court date the attorneys had an opportunity to address the court, and I have had an opportunity to review all of the pleadings on file relating to the cross-motions, the cases, the authority.

Having reviewed all of that, I'm going to grant the liquidator's request for declaratory relief, and I find that the contracts are not executory.

Although the liquidator asked for alternative relief, I'm finding today that the contracts are not executory.

I'll enter an order to that effect, and those obligations at the time, as of the date of liquidation, ...

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