Download PDF - Goodmans

Drake v. Rollo, 7 Fed. Cas. Pg. 1053, Case No. 4066 (N.D. Ill. 1872). A claim for fire
loss under an insurance policy may be set off against an indebtedness of the
insured to the insolvent insurance company, even though such a set off gives a
preference to the insured. The insurer was rendered insolvent by the Chicago
Fire of October 9, 1871, and the court held that the loan to the insured and the
loss under the insurance policy constituted a mutual debt and credit.
Lincoln Towers Insurance Agency, Inc. v. Boozell, 291 Ill. App. 3d 965, 684
N.E.2d 900 (1997), appeal denied, 175 Ill.2d 529, 689 N.E.2d 1140 (1997).
Plaintiff, an insurance producer, sought a declaration of its right to set off
claims against an insolvent insurer for commissions against premiums due
the insolvent company. The court first held that because the set off
provision embodied in Section 206 of the Illinois Insurance Code was in
existence before the contract in question was executed and no contractual
language barred its application, it was a part of the contract. Section 206
requires a mutuality in debts and credits that result from insurance
transactions if a set off is to be allowed. Given that all money received by
the producer for selling or renewing insurance policies was held by the
producer in a fiduciary capacity for the benefit of the insurer, the court held
that there was no mutuality necessary to permit a set off under Section 206.
The court further noted that to permit the producer to receive the full
amount of their commission through set‐offs would work to the detriment
of other creditors.
In re Rehabilitation of Am. Mutual Reins. Co., 238 Ill. App. 3d 1, 606 N.E.2d 32
( 1992). One of Amerco's cedents filed a petition with the court supervising
Amerco's rehabilitation, asking the court to order the rehabilitator to
recognize the ceding company's alleged set off rights. The cedent argued
that the rehabilitation plan's limitation on its set off rights was contrary to
Section 206 of the Illinois Insurance Code. The court held that the purpose
of Illinois' Insurance Code is to rehabilitate as well as liquidate, conserve, and
dissolve insolvent insurance companies. Thus, the rehabilitator's regulation
of setoff rights does not conflict with § 206 of the Insurance Code. The court
further noted that by seeking unlimited exercise of its set off rights, the
cedent was threatening to undermine the rehabilitative process.
In re Rehabilitation of American Mut'l Reins. Co., No. 1‐90‐3384 (Ill. Ct. App.
June 26, 1992). Company, which was reinsured by and reinsurer to reinsurance
company in rehabilitation, challenged set‐off provisions under rehabilitation
plan. Rehabilitation plan permitted companies in dual relationship as reinsured
and reinsurer to set‐off obligations in one quarter with amount owed to them in
the same quarter. However, the plan permitted the amounts owed to be paid
part in cash and part in interest‐bearing surplus drafts. The Appellate Court held
that, reading provisions of Illinois Insurance Code relating to set‐offs in context
of all of the receivership provisions of the Code, (1) company had an opportunity
to object to set‐off provisions during consideration of the rehabilitation plan but
failed to do so; and (2) rehabilitation plan did not improperly impair statutory
set‐off rights.
O'Connor v. Insurance Company of North America, 622 F. Supp. 611 (N.D. Ill.
1985) reconsideration denied, 668 F. Supp. 1183 (1987), appeal granted (1989).
The court held that the reinsurance proceeds due the liquidator could be set off
by the other debts owed to the reinsurers by the insolvent insurer, which were
primarily unearned premiums and the insolvent insurer's share of the
reinsurance pool. The court rejected the holding of Melco System v. Receivers
of Transamerica Ins. Co., 268 Ala.152, 105 So.2d 43 (1958) by holding that the
concept of "mutuality" was applicable because the reinsurance proceeds are
preliquidation assets that could be set off against the preliquidation debts of
the insolvent insurer to the reinsurers.