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contract. Further, as the parties to the reinsurance policy agreed that the
reinsurance shall be subject to all the conditions and stipulations of the original
policy and to the exact proportion of the original premium which the assured
itself received, the receiver became entitled to collect the unearned premiums
in the hands of the reinsurer on all reinsurance at the time the primary insurer
was adjudicated insolvent.
Ninth Circuit
Tenth Circuit
Excess and Casualty Reinsurance Association v. Insurance Commissioner of
California, 656 F.2d 491 (9th Cir. 1981). When the guaranty fund attempted to
collect reinsurance proceeds directly from the reinsurers of an insolvent
insurer, the court denied the guaranty fund's claim and determined that the
reinsurance contract was between the insolvent insurer and its reinsurer. The
guaranty fund was subrogated to the rights of policyholders, and since the
policyholders had no rights to the proceeds, neither did the guaranty fund.
Grimes v. Crown Life Ins. Co., 857 F.2d 699 (10th Cir. 1988). The insurance
commissioner, as receiver of an insolvent carrier, sought to interpret the
provisions of a reinsurance contract in state court. The reinsurance carrier
removed the action to federal district court which declined to remand the
action and decided the merits of the case. In reversing the decision of the
district court, the United States Court of Appeals for the Tenth Circuit held that
the State of Oklahoma had "adopted a comprehensive scheme to oversee the
liquidation of insolvent insurers" and, therefore, the district court should have
abstained from exercising its jurisdiction in the matter. 857 F.2d at 705.
Alabama Melco System v. Receivers of Trans‐America Ins. Co., 268 Ala. 152, 105 So. 2d 43
(1958). The receivers of an insurance company petitioned the court in equity
for authority to accept the compromise settlement negotiated with a
reinsurer, and certain creditors of the insurer contested this settlement. The
reinsurer of the insolvent insurer offered to pay an amount in settlement of all
claims arising out of the reinsurance contract. An insured of the insolvent
insurer claimed a status as a third party beneficiary to the reinsurance contract
and sought to sue the reinsurer directly, and questioned whether the proceeds
of the settlement should be treated as general assets of the estate. The
reinsurance contract had an insolvency clause which provided that the
reinsurer would pay directly to the liquidator or the insolvent insurer. The
court held that the receiver was entitled to receive the proceeds of the
reinsurance settlement. Those proceeds are general assets of the estate.
Arizona
Pioneer Annuity Life Insurance Company v. National Equity Life Insurance
Company, 159 Ariz 148; 765 P.2d 550 (Ariz. App. 1988). The Arizona Court of
Appeal held that the common law remedy of constructive trust is available for
an insolvent reinsurer's breach of fiduciary duty to its subsidiary ceding
company. Pioneer Annuity Life Insurance Company ("Pioneer") caused its
subsidiary National Equity Life Insurance Company ("NELIC") to pay a $1.2
million premium for reinsurance of certain annuity obligations. Pioneer used
the proceeds to acquire another insurance company and defaulted on its
reinsurance obligation. After the insolvency of both companies, NELIC's
receiver contended that Pioneer's receiver held the $1.2 million subject to a
constructive trust. Pioneer's receiver contended NELIC had only an unsecured,
junior priority claim. It argued that the Uniform Insurers' Liquidation Act, as
adopted in Arizona, comprehensively enumerates permissible secured claims
and distribution priorities and implicitly bars other common law or equitable
remedies. Rejecting that view, the court held that the statute is "designed to
embrace and to be applied harmoniously with consistent common law and
equitable concepts," and does not preclude the imposition of a constructive
trust. On the facts alleged, NELIC's receiver had stated claim for such relief.