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In re Liquidation of Inter-American Insurance Co. of Illinois

March 29, 2002

IN RE LIQUIDATION OF INTER-AMERICAN INSURANCE COMPANY OF ILLINOIS
(EMPLOYERS REASSURANCE CORPORATION, PLAINTIFF-APPELLANT,
v.
NATHANIEL S. SHAPO, DIRECTOR OF INSURANCE, DEFENDANT-APPELLEE).



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.

UNPUBLISHED

Appellant Employers Reassurance Corporation (ERAC) was one of seven reinsurers of now-insolvent life insurance provider Inter-American Insurance Company of Illinois (Inter-American). There were five reinsurance agreements in force between Inter-American and ERAC. In 1988, certain aspects of the segregated agreements were consolidated by the parties into a reinsurance agreement known as the "Segregated Asset Portfolio Agreement" (SAPA). But, the insuring agreements in the original contracts were not modified. Inter-American became insolvent and was declared insolvent on December 23, 1991, and the circuit court affirmed the Director of the Illinois Department of Insurance as the statutory liquidator (the Liquidator).

ERAC contended that its agreement with Inter-American was "executory" as to policyholders who had not died at liquidation. However, the Liquidator contended that the agreement was not executory. The matter was resolved in the Liquidator's favor on a cross-motion for declaratory relief. The trial court, after a full trial, also decided that ERAC had breached its reinsurance agreements with Inter-American by not paying the bills tendered to it by the Liquidator. During trial, the Liquidator requested leave to file its third amended counterclaim. In its final ruling, the trial court granted the Liquidator leave to file his amended counterclaim.

ERAC now presents the following issues upon appeal: (1) whether the contracts were executory; (2) whether the trial court erred in denying ERAC's motion for directed finding; (3) whether the trial court erred in granting the Liquidator's third motion to amend; and (4) assuming the trial court properly granted the Liquidator's third motion to amend, whether Inter-American provided consideration under the contract and established waiver by clear and convincing evidence.

For the reasons stated below, we affirm.

BACKGROUND

Inter-American entered into reinsurance contracts (Treaties) with ERAC, formerly known as Puritan Life Insurance Company, between 1984 and 1986. Pursuant to these Treaties, Inter-American was to cede reinsurance premiums to ERAC and ERAC was to assume the reinsurance as reported by Inter-American according to the Treaties. In December 1987, the Department advised Inter-American that it would not approve of the Treaties because, in the Department's view, they did not reflect a transfer of investment risk from the ceding company, Inter-American, to the reinsurer, ERAC. Amended Treaties were due to the Department on or before March 15, 1988. If not amended and received by then, the Department would "take action to disapprove the treaty and reserve credit will be disallowed."

To address the concerns of the Department, the parties entered into the agreement known as the SAPA in March 1988, nunc pro tunc January 1, 1988. The SAPA required Inter-American to establish and maintain assets in a portfolio. Articles V and VI of the SAPA required quarterly and year-end reporting of the investment results to ERAC. The insolvency clause in the SAPA provided, in part:

"The ceding insurer [Inter-American] and the reinsurer [ERAC] agree that, in the event of the insolvency of the ceding insurer, as to all reinsurance made, ceded, renewed or otherwise becoming effective after the effective date of this agreement, the reinsurance shall be payable by the reinsurer on the basis of the amount of liability of the ceding insurer under the contract or contracts reinsured, without diminution because of the insolvency of the ceding insurer."

The SAPA further provided: "The total amount of the portfolio shall be adjusted by the REINSURED as of the end of each calendar year" as described by New York State Insurance Department Regulation 126 (Regulation 126). Inter-American made quarterly reports to ERAC from March 1988 through June 1991 and submitted reinsurance premium payments to ERAC.

Inter-American was declared insolvent on December 23, 1991. In September 1992, the Liquidator filed a petition to conditionally reject the "surplus relief agreements" entered into by Inter-American and to declare that they were not executory. ERAC filed a cross-motion for declaratory relief. In April 1994, ERAC filed a motion for summary judgment on its cross-motion for declaratory relief. The court later allowed ERAC's motion for summary judgment to be withdrawn. In September 1994, the liquidation court ruled that the policyholders who had not died by the date of liquidation could file claims against the estate for the current net present value of their policies. The court also approved the Liquidator's methodology for calculating the value of the policies.

The Liquidator filed a renewed cross-motion for declaratory relief against ERAC on July 26, 1995. ERAC filed its amended cross-motion for declaratory relief on the same date. In September 1995, the circuit court ruled that the reinsurance contracts were not executory. ERAC and Alabama Reassurance Company (Alabama Re) appealed that ruling. The Illinois Appellate Court dismissed the appeal in an unpublished order as premature. See In re Liquidation of Inter-American Insurance Co., 284 Ill. App. 3d 1112, 708 N.E.2d 1272 (1996).

In November 1995, the Liquidator moved to dismiss counts II through VII of ERAC's amended cross-motion for declaratory relief. The circuit court denied the motion and ordered the Liquidator to answer those counts. In its answer, the Liquidator asserted its affirmative defenses: (1) laches; (2) waiver and estoppel; and (3) negligence by Inter-American. Additionally, the Liquidator presented a counterclaim for breach of contract.

In January 1997, ERAC moved to dismiss the Liquidator's counterclaim and filed its responses to the Liquidator's affirmative defenses. The Liquidator filed an amended counterclaim asserting breach of contract and quantum meruit. ERAC filed a motion to dismiss the Liquidator's quantum meruit claim and also filed an answer to the breach of contract claim. The parties submitted an agreed order dismissing the quantum meruit count.

An agreed pretrial stipulation was filed by the parties in May 1998. On May 11, 1998, the Liquidator filed its revised second amended counterclaim, which alleged that Inter-American performed all of its material obligations under the Treaties and that ERAC breached the contract by refusing to pay the sums to Inter-Americans policyholders. The trial commenced in June 1998. Rick Browne of Inter-American testified for the Liquidator that when he discussed the SAPA drafts with James Maughn of ERAC, they discussed Inter-American's "ability to do Regulation 126 type testing or asset adequacy analysis, that Inter-American at that time was not equipped, did not have the systems to do that, but that we would--we both knew that it was a requirement that insurance companies were going to have to do this type of testing in the near future." Browne had several conversations with Maughn relative to what assets where in the segregated asset portfolio and what sort of reporting was provided to ERAC by Inter-American. Browne did not recall any specific request from Maughn to perform Regulation 126 analysis and he never told Maughn that Inter-American had conducted Regulation 126 analysis.

Browne further testified that at year-end 1990, Inter-American had not updated the segregated asset portfolio listing to reflect transactions for 1990. When Browne discovered that the individuals responsible for completing the work had not updated the portfolio, he and Inter-American actuary Terrence Erickson resolved that they would estimate the investment returns that should be credited to ERAC under the agreements, based on their knowledge of the historic performance of the portfolio and their general historic knowledge of what transactions were likely to have occurred.

Browne stated that during "1989, 1990, or the first six months of 1991," no one from ERAC came in to inspect the records of Inter-American pertaining to the portfolio. Inter-American prepared quarterly reports and typically sent them to ERAC auditor Laura Fields. He stated that she would contact Inter-American if she observed errors or if she had questions about the reports. He further testified that Inter-American paid ERAC the quarterly amounts due for the reinsurance ERAC provided. Browne recalled having a 20-minute phone conversation with Fields in approximately March 1990 informing her that estimates had been made.

In November 1991, Browne met with Laura Fields, James Maughn, and a reinsurance intermediary from Mystic Reinsurance in Inter-American's Chicago offices. At that meeting, they discussed the Department's investigation and Inter-American's "need to do cash flow scenario testing on the [ERAC] block of business, and at that meeting Mr. Maughn suggested that Mystic Reinsurance might be able to help us with that type of cash flow testing." Browne did not recall any complaints regarding the use of estimated figures during that meeting.

Peter Gallanis, a special deputy receiver for the Department, testified that when Inter-American went into liquidation, Inter-American had not paid all of its liabilities under its insurance policies. Gallanis further testified that Inter-American's nonpayment did not release ERAC from its reinsurance obligations.

Raymond Schlude, Jr., a consulting actuary, testified on behalf of the Liquidator. He was asked to assist the Liquidator in determining whether and how much ERAC owed Inter-American's estate for reinsurance. Schlude stated that in his investigation, he reviewed the asset portfolio as of December 31, 1988, but did not find a portfolio as of December 31, 1989. He also testified that Inter-American was specifically required by the SAPA to conduct Regulation 126 analysis. He further testified that based on the reports that he made, "Employers Re owes Inter-American 9.55 million on the date of liquidation."

ERAC moved for a directed finding after the direct examination of Browne and the full testimony of Gallanis and Schlude. That motion was denied. The following day, after the cross-examination of Rick Browne and the close of the Liquidator's case in chief, ERAC renewed its motion for directed finding. That motion was also denied.

ERAC accountant Laura Fields testified for ERAC that she conducted an audit of Inter-American in 1988. In March 1990, Fields received a fax from Inter-American actuary Erickson that included the annual accounting for year-end 1989. There was a notation on that fax transmittal that indicated to Fields that the portfolio listing would follow. Months later, Fields called Inter-American to follow up on the portfolio listing that she had not yet received. At that time, no one at Inter-American informed her that Inter-American had stopped maintaining the portfolio. Fields testified that Browne never told her that Inter-American had stopped maintaining the portfolio. She stated that as an accountant, she did not have the authority to change any of the terms of the SAPA. Fields recalled that the year-end 1990 report from Inter-American reflected an unanticipated increase in the amount of surplus relief that ERAC granted them.

Fields further testified that she, James Maughn, and an ERAC internal audit employee met with Rick Browne in Chicago on November 5, 1991. She recalled that they discussed the asset listing and other concerns. Jim Knutson of Inter-American asked Fields to accompany him to his office to retrieve the listing. However, "he couldn't seem to place his hands on it," so she asked him to send it to her by mail. She never received it. During the first week of December 1991, Fields returned to Chicago for an unrelated audit and notified Inter-American that she ...


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