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the insolvent Mission Insurance Company lacked the requisite mutuality with
a debt owed by Mission to permit setoff. Imperial Casualty reinsured each of
the three Mission companies; however, only Mission ‐‐ not its subsidiaries,
Mission National or Holland America ‐‐ reinsured Imperial. Although the
treaties at issue referred to the Mission companies collectively as "the
Company," the court found that mutuality for setoff purposes was lacking,
holding that setoffs are limited to mutual debts and credits between
principal reinsurers.
Prudential Reinsurance Company v. Superior Court, 3 Cal. 4th 1118 (1992). The
California Supreme Court held that mutual debts and credits between an
insolvent insurance company and its reinsurers arising out of reciprocal
reinsurance relationships qualify for set‐off under Section 1031 of the California
Insurance Code. In a suit by the liquidator of the Mission Insurance Companies
("Mission"), Mission's reinsurers sought to reduce their obligations for
reinsurance proceeds payable to the insolvent estates by amounts which
Mission owed to the reinsurers under contracts in which Mission had reinsured
them and by the amount of any unearned premium held by Mission at the time
it was ordered into liquidation. The Liquidator contended that such set‐off by
general creditors constituted an improper preference which defeated the
statutory distribution priority favoring policyholders. The Liquidator further
argued that obligations of the insolvent were not "mutual" with the preinsolvency
obligations owed to the insolvent by the reinsurers. The California
Supreme Court held that the liquidator "stands in the shoes" of the insolvent
insurer and that all debts and credits arising out of pre‐insolvency contracts
remain mutual for purposes of the statutory right to set off under Section 1031
of the California Insurance Code.
Colorado
Balzano v. Bluewater, 823 P.2d 1365 (Colo. 1992). Insurance commissioners have
the general power to supervise reinsurance contracts in the public interest,
including the power to disallow reinsurance contracts containing setoff
provisions. The Colorado Supreme Court also held that allowing setoffs in a
liquidation proceeding destroys the quid pro quo between the insurer and
reinsurer. The court held that setoffs could be denied on a number of grounds.
Setoff can be properly denied where there is an insolvency clause which
provides that, in the case of insolvency, the reinsurance is payable to the
receiver without diminution. Setoff may also be denied pursuant to Colorado
liquidation law which requires that reinsurance be payable by the reinsurer on
the basis of contractual liability. Other provisions of the insurance code also
justify disallowing setoffs, for example, the "absolute transfer clause" which
provides that if a primary insurer is to take a credit for reserves on risks ceded to
a reinsurer, the reinsurance contract must result in the absolute transfer to the
reinsurer of the risk or liability. The further noted that the reinsurer signed the
reinsurance contract even though the Division of Insurance would not approve
the contract unless the setoff provision was omitted. The reinsurer, therefore,
entered in to the contract knowing that setoff would not be allowed. It was
also noted that the reinsurer chose not to terminate the contract even though
the insolvent insurer had not paid premiums to the reinsurer for at least five
consecutive quarters.
Colo. Ins. Guar. Ass’n v. Menor, 166 P.3d 205 (Colo. Ct. App. 2007). Appellant
Colorado Insurance Guaranty Association (“CIGA”) sought to modify, terminate,
or suspend appellee employee’s workers’ compensation benefits, asserting
entitlement to a statutory offset in the employee’s uninsured and underinsured
motorist (“UM/UIM”) insurance settlement. The Colorado Court of Appeals
held that COLO. REV. STAT. § 10‐4‐512(1) (2006) addresses an injured party’s claim
against his own insurer for any type of insurance that is also a “covered claim”
under the CIGA Act (COLO. REV. STAT. § 10‐4‐501, et seq.), and is intended to
further the purposes of the CIGA Act by ensuring nonduplication of recovery.