Download PDF - Goodmans

in the reinsurance agreement or, in fact, provide any basis for concluding that
failure to give notice changes the validity of the actual agreement. Thus, the
policyholder was bound by the terms of the agreement.
New York In re Liquidation of Galaxy Ins. Co., 710 N.Y.S.2d 72 (App. Div. 2000). The
liquidator sued an insurance company that issued suretyship certificates to
policyholders of the insolvent insurer, pursuant to which the company agreed to
assume the insurer’s liabilities in case of insolvency. The court held that any
ambiguity as to conditions precedent in the agreement would be construed
against the company that was required to assume the insolvent insurer’s
liabilities.
Michigan National Bank‐Oakland v. American Centennial Ins. Co. (In re Union
Indemnity. Ins. Co.), 89 N.Y. 2d 94, 651 N.Y.S. 2d 383, 674 N.E. 2d 313 (1996).
The Court of Appeals upheld the affirmative defense of fraud, which resulted
in rescission of reinsurance contracts of an insolvent insurer. The Court ruled
that insolvency is a material fact that insurers are required to disclose to
reinsurers. Failure to disclose insolvency may constitute fraud in the
inducement of the reinsurance agreements, resulting in their
unenforceability. The court found that statements by the Liquidator’s
counsel in a related action that Union Indemnity had fraudulently induced
reinsurers to accept business when its financial condition was impaired were
found to be informal judicial admissions. If the reinsurers had known of
Union Indemnity’s insolvent financial condition, they would not have
reinsured the company’s business.
The Court held that it was not improper to admit the informal judicial
admissions against the Liquidator. An insurer’s insolvency is a material fact
that must be disclosed to a potential reinsurer and failure to do so voids the
reinsurance treaties as against both the Liquidator and the beneficiary of a
bond issued by the insolvent insurer. The Court stated that it would be
“unseemly” for the Liquidator to use admissions to document Union
Indemnity’s fraud and to then deny the relevance of those admissions in an
action involving Union Indemnity’s reinsurers.
The Court rejected the argument of the Insurance Superintendent that
rescission was precluded by the New York statutory liquidation scheme.
Rather, the court reasoned that the liquidator stands in the shoes of the
insolvent insurer; liquidation cannot place the liquidator in a better position
than the insolvent company would have been in if it was not insolvent, nor
can liquidation authorize the liquidator to demand rights or defenses that
the company would not have been entitled to prior to liquidation. The
decision ultimately deprived Union Indemnity's creditors, including state
insurance guaranty funds, of additional assets that would have been
available for distribution from the estate due to the collection of
reinsurance.
Reese v. Smith, 95 N.Y. 645 (1884). The receiver of an insolvent New York life
insurance company entered into a contract with a Connecticut company,
whereby the latter agreed to undertake the former's outstanding policy
liabilities. Certain policyholders in the New York company surrendered their
policies to the Connecticut company, receiving its policies in exchange. The
court held that the Connecticut company did not thereby become a
policyholder in the New York company and was not entitled to share in the
distribution as such.