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U.S. Supreme Forsythe v. Kimball, 91 U.S. 291 (1875). An insured was unsuccessful in
sustaining an argument that a $5,000 loan from an insolvent insurance
company given to him and his four brothers should be used in total as offset
against $11,000 fire loss sustained by one brother. The insured was only
allowed to set off his proportional share of the loan.
Scammon v. Kimball, 92 U.S. 362 (1875). A private banker, who was a director
of an insolvent insurance company, and who also was an insured, was
permitted to set off against an amount held as the insurer's banker, losses
arising from The Great Chicago Fire of 1871, but not an obligation given by the
insured banker to secure balances of stock subscriptions.
Sawyer v. Hoag, 84 U.S. 610 (1873). Stockholders of an insolvent insurance
company were not allowed to set off against losses the stockholders' unpaid
debts to an insolvent insurance company owed for stock since such debts
were a trust fund devoted to the payment of all creditors of the company. In
essence, the debts were not mutual, since the stockholders' debts belonged
equally to all creditors and not just the corporation.
Second Circuit
Fifth Circuit
Seventh Circuit
Theodore Rich, Commissioner of Insurance of the Commonwealth of
Kentucky, as Liquidator of Delta America Re Insurance Company v. Federal
Insurance Company, 113 F. 3d 1230 (2d Cir. 1997). This case involved an effort
by Federal Insurance Company to obtain an offset against Delta America Re
in Liquidation. The Court affirmed the decision of the district court sub. nom.
Don W. Stephens v. Federal Insurance Company (93 Civ. 4222 (JSM), 1995 WL
702385, S.D.N.Y., Nov. 28, 1995) that allowed the setoff. The district court
found that Federal had reinsured Delta. In a separate transaction, Delta had
reinsured a reinsurance pool of which Federal was a member. After Delta
was placed in liquidation by Kentucky, the Liquidator demanded balances
due from Federal. As an affirmative defense, Federal claimed a setoff in the
amount of Federal’s proportional share under the reinsurance pool
arrangement. The district court, in Stephens v. American Home Assurance
Co., 811 F. Supp. 937 (S.D.N.Y.), had previously ruled that Kentucky law
governed setoffs in the Delta liquidation. Kentucky law allows a setoff when
there is a mutuality of obligation. The court ruled that although Delta’s
obligation ran to a pool rather than to Federal directly, the mutuality
requirement was fulfilled because both Delta and Federal were parties to
reinsurance contracts.
Malone v. Robertson, 88 F. Supp. 749 (N.D. Fla. 1950), aff’d in part, rev'd in
part, 190 F.2d 756 (5th Cir. 1951). In a suit by the Pennsylvania liquidator of an
insolvent insurer to recover unremitted premiums held by a Florida agent, the
agent filed a counterclaim asserting a right to offset premium amounts owed
to the agent under a separate contract with the insurer. The trial court held
that the counterclaim could only be asserted in the Pennsylvania liquidation
proceeding. On appeal, the court held that the agent had no right to set off
personal debts owing from the insolvent company against funds of the
company held in the capacity as agent. However, the agent's counterclaim
could be asserted in the Florida proceeding because the Pennsylvania
liquidation court had not issued an order staying the assertion of claims against
the liquidator. Any judgment in the Florida proceeding would only serve to
liquidate the agent's claim and entitle the agent to share in the assets of the
insurer pro‐rata in the liquidation proceeding.
Fabe v. Facer Insurance Agency, Inc., 588 F. Supp. 1330 (N.D. Ill. 1984) (7th Cir.
Oct. 9, 1985), cert. denied, 475 U.S. 1013, affirmed, 733 F.2d 142. The insurance
code prohibits agents from setting off against premiums due to an insolvent
insurer the unearned portion of premium on any cancelled policy unless the
policy was cancelled prior to the entry of order of liquidation and unless the