Reinsurance has a well known meaning, and, as the usual compact
of reinsurance has been understood in the commercial world for many
years, the liability of the reinsurer is not affected by the
insolvency of the reinsured company or by the inability of the
latter to fulfill its own contracts with the original insured, and,
in this case, the compact, notwithstanding it refers to losses
paid, will be construed to cover losses payable by the reinsured
company, and, in a suit by the receiver of that company on the
compact, the fact of its insolvency and nonpayment of the risks
reinsured does not constitute a defense.
28 App. D.C. 330 affirmed.
Page 209 U. S. 327
This action was brought by plaintiff, who is the defendant in
error, in the Supreme Court of the District of Columbia, for the
purpose of recovering an amount alleged to be due the plaintiff
from the defendant (plaintiff in error) on a policy of reinsurance.
The plaintiff obtained judgment in the trial court, which was
affirmed in the Court of Appeals of the District.
The plaintiff had originally insured the property which was
destroyed, and had, prior to the loss, reinsured a proportion of
the original insurance with the defendant company. After such
reinsurance, the plaintiff suffered heavy losses by reason of the
great fire in the City of Baltimore in the month of February, 1904,
for which losses it became liable, and was rendered thereby
insolvent, and is unable to pay the same unless the plaintiff is
able to collect the amount due it from the defendant by virtue of
its reinsurance policies, and from other corporate fire insurance
companies with which plaintiff had contracts of reinsurance. By
reason of the insolvency of the corporation a receiver was
appointed by a decree of the Circuit Court of Baltimore City prior
to the commencement of this action.
Upon the trial, the plaintiff proved a cause of action against
the defendant, unless the facts, which it also proved, that it had
become insolvent by reason of the losses sustained by it incident
to the Baltimore fire in 1904, and that a receiver had been
appointed for it by the court in Maryland, and that the receiver
had paid to its creditors, after this suit was brought, but 55
percent of the amount of its liability, amounted to a defense.
The contract between the plaintiff and defendant was described
therein as a "reinsurance compact," and in it, the defendant agreed
to "reinsure the Firemen's Insurance Company" in the amounts and
manner therein stated.
There were contained in the compact, and forming part thereof,
the following subdivisions:
"10. Upon receiving notice of any loss or claim under any
Page 209 U. S. 328
contract hereunder reinsured, the said reinsured company shall
promptly advise the said Allemannia Fire Insurance Company at
Pittsburg, Pennsylvania, of the same, and of the date and probable
amount of loss or damage, and after said reinsured company shall
have adjusted, accepted proofs of, or paid such loss of damage, it
shall forward to the said Allemannia Fire Insurance Company at
Pittsburg, Pennsylvania, a proof of its loss and claim against this
company, upon blanks furnished for that purpose by said Firemen's
Insurance Company, together with a copy of the original proofs and
claim under its contract reinsured, and a copy of the original
receipt taken upon the payment of such loss; and, upon request,
shall exhibit and permit copies to be made of all other papers
connected therewith, which may be in its possession."
"11. Each entry under this compact, unless otherwise provided in
this compact, shall be subject to the same conditions,
stipulations, risks, and valuation as may be assumed by the said
reinsured company under its original contracts hereunder reinsured,
and losses, if any, shall be payable
pro rata with, in the
same manner, and upon the same terms and conditions, as paid by the
said reinsured company under its contracts hereunder reinsured, and
in no event shall this company be liable for an amount in excess of
a ratable proportion of the sum actually paid to the assured or
reinsured by the said reinsured company under its original
contracts hereunder reinsured, after deducting therefrom any and
all liability of other reinsurers of said contracts or any part
thereof."
The defendant gave no evidence, but requested the court to
instruct the jury as follows:
"No. 2. The jury are instructed that proof of mere liability on
the part of the plaintiff under the original contracts or policies
involved in this suit is not sufficient to entitle it to a verdict
against the defendant, and the jury are therefore further
instructed that they must return a verdict in favor of the
defendant, unless they shall find from the evidence that the
plaintiff has actually paid the whole or some
Page 209 U. S. 329
part of one or more of the claims against it, enumerated in the
schedule annexed to the contract of reinsurance here sued
upon."
"No. 3. The jury are instructed that, if they find for the
plaintiff, their verdict must not be for an amount in excess of a
ratable proportion of the various sums actually paid by it to its
policy holders under the original contracts or policies enumerated
in the schedule attached to the declaration filed herein."
These instructions were refused and the refusal duly excepted
to. Thereupon the jury, under instructions, returned a verdict in
favor of the plaintiff for $12,613.24, being the amount which it
was conceded was due under the reinsurance compact, provided the
fact of insolvency and nonpayment by the reinsured did not
constitute a defense.
Page 209 U. S. 331
MR. JUSTICE PECKHAM, after making the foregoing statement,
delivered the opinion of the Court.
The only question before the court is as to the construction
Page 209 U. S. 332
of the language of the reinsurance compact. The term
"reinsurance" has a well known meaning. That kind of a contract has
been in force in the commercial world for a long number of years,
and it is entirely different from what is termed "double insurance"
--
i.e., an insurance of the same interest. The contract
is one of indemnity to the person or corporation reinsured, and it
binds the reinsurer to pay to the reinsured the whole loss
sustained in respect to the subject of the insurance to the extent
to which he is reinsured. It is not necessary that the reinsured
should first pay the loss to the party first insured before
proceeding against the reinsurer upon his contract. The liability
of the latter is not affected by the insolvency of the insured or
by its inability to fulfill its own contract with the original
insured. The claim of the reinsured rests upon its liability to pay
its loss to the original insured, and is not based upon the greater
or less ability to pay by the reinsured. If the reinsured commenced
his action against the reinsurer before he had himself paid the
loss, the reinsured took upon himself the burden of making out his
claim with the same precision that the first insured would be
required to do in an action against him. But there is no authority
for saying that he must pay the loss before enforcing his claim
against the reinsurer. These propositions are adverted to an
enforced in
Hone &c. v. Mutual Safety Insurance
Company, 1 Sandf. 137, where the authorities upon the subject
are gathered and reviewed at some length. The case itself was
subsequently affirmed in the Court of Appeals in 2 N.Y. 235.
See also Blackstone v. Alemannia Fire Insurance Company,
56 N.Y. 104. The same doctrine is held in
Consolidated Real
Estate &c. v. Cashow, 41 Md. 59.
Counsel for plaintiff in error frankly concedes that the legal
propositions above stated are correct, and, unless there is
something in the special provisions of this reinsurance contract
which changes the ordinary rule on that subject, the judgment
herein must be affirmed. Reference is made to the eleventh
subdivision of the policy in question. Under the language of
Page 209 U. S. 333
that clause, the plaintiff in error contends that the general
rule is altered, and that, unless the reinsured had paid over the
money on account of the loss to the original insured, the reinsurer
is not bound to pay under this particular contract of reinsurance.
Language somewhat like that used in the eleventh subdivision has
been construed in other cases. In
Blackstone v. Alemannia Fire
Insurance Company, supra, the language used was "loss, if any,
payable
pro rata, and at the same time with the
reinsured." The Court of Appeals of New York held that the first
part of the clause relieved the defendant from paying the full
amount of the loss, and made it liable only for its
pro
rata share, so that, the defendant's reinsurance being for
half the loss, the defendant was only held liable to pay half the
loss. Continuing, the court said:
"In regard to the latter branch of the clause in question, which
says that the loss is payable 'at the same time with the
reinsured,' it is not possible to conclude from it that actual
payment by the reinsured is, in fact to precede or to accompany
payment by the reinsurer. It looks to the time of payability, and
not to the fact of payment. It has its operation in fixing the same
period for the duty of payment by the reinsurer as was fixed for
payment by the reinsured. To give to it the construction contended
for by the defendant would, in substance, subvert the whole
contract of reinsurance as hitherto understood in this state."
In
Ex Parte Norwood, 3 Biss. 504, a clause in the
reinsurance policy stated that "loss, if any, payable at the same
time and
pro rata with the insured," and it was held that
such language simply gives to the company the benefit of any
defense, deduction, or equity which the first insurer may have,
making the liability of the reinsurer the same as the original
insurer. It does not limit such liability to what the original
insurer may have paid or be able to pay. Speaking of this clause,
Judge Blodgett said:
"The reinsuring company is to have the benefit of any deduction
by reason of other insurance or salvage, that the
Page 209 U. S. 334
original company would have, and also to have the benefit of any
time for delay or examination which the original company might
claim, so that the liability of the reinsuring company shall be
coextensive only with the liability, and not with the ability, so
to speak, of the original company."
"The original company may have reinsured for the purpose for
which reinsurance is usually, if not universally, accomplished --
for the purpose of supplying itself with a fund with which to meet
its obligations. It may have placed its own funds entirely out of
its control; it may have divided its capital among its
stockholders, and may depend solely upon the reinsurance to make
good its liability to policy holders."
"The intention of this clause was to make the reinsuring
company's liability coextensive, and only coextensive, with the
liability of the original insurance company."
"For instance, suppose an insurance company in the City of
Chicago wishes to go out of business. It has money enough to
reinsure all its risks, and does so, and goes out of the insurance
business. That company does not keep a fund on hand any longer for
the purpose of meeting losses as they fall in, but depends upon its
reinsurance."
"Now, it is to my mind absurd to say, if a loss occurs on one of
those reinsured policies, that the company primarily liable is to
have its claim against the reinsuring company limited by its
ability to meet its obligations to its original policy holders. The
very object of making the policy of reinsurance was to place the
company in funds with which to make its policy holders whole, and
that is defeated if the construction which is insisted upon by the
assignee in this case is the true one."
"The fair, liberal construction, it seems to me, of this clause,
and the salutary one, is to assume that the true intent of it --
the judicial meaning -- is that the liability of the reinsurance
company is to be no greater than that of the original company; that
they are not to be compelled to pay any faster than the original
company would be compelled to pay; that they are to have the
benefit of any defense which the original company
Page 209 U. S. 335
would have had. Any deduction -- any equity -- which the
original company would have had against the original insured is to
inure to the benefit of the reinsuring company."
"I am of opinion that the Republic is liable on these policies
to the extent of the adjusted losses, even if the Lorillard had not
paid a cent."
In
Cashau v. Northwestern &c. Insurance Co., 5
Biss. 476, in the reinsurance policy there was a clause that the
reinsurer shall "pay
pro rata at and in the same time and
manner as the reinsured." It was held that the reinsurer was to
have all the advantages of the time and manner of payment specified
in the policy of the reinsured, but that it had no reference to the
insolvency of the reinsured. The court in that case said:
"The insolvency of the original insurer is no defense, in whole
or in part, to a suit against the reinsurer. It is claimed on the
part of the defendant that the condition in its policy is an
exception to this position of the law. . . . The condition in that
policy that, 'in case of loss the company shall pay
pro
rata at and in the same time and manner as the reinsured,'
cannot mean that, in case of the insolvency of the Fulton company,
the defendant shall only be obliged to pay the
pro rata of
the dividends of the assets of said company, upon the claim of the
first insured. It cannot have such application. The condition means
that the defendant shall pay at and in the same time and manner as
the reinsured company shall pay or be bound to pay according to its
policy, and that the defendant shall have all the advantages of the
time and manner of payment specified in the policy of the Fulton
company -- otherwise the defendant's policy would not be the
contract of indemnity intended, and endless litigation might
ensue."
Bearing in mind what the contract of reinsurance, pure and
simple, means, and how these contracts have been enforced in the
past when some special language has been introduced in regard to
the payment under a reinsurance policy, the question arises
whether, by the use of the language of the eleventh subdivision,
the contract of reinsurance, while still
Page 209 U. S. 336
bearing that name, has been so changed as to deprive it of its
chief value. As is stated by Judge Johnson in regard to the
language used in 56 N.Y.,
supra, to give this language
this construction will, in substance, subvert the whole contract of
reinsurance as hitherto understood. We agree with the court below
that the language of the eleventh subdivision, taken in connection
with the fact that it is used in a contract designated by the
parties as one of reinsurance, means that the reinsuring company
shall not pay more than its ratable proportion of the actual
liability payable on the part of the reinsured, after deducting all
liability of other reinsurers.
To hold otherwise is to utterly subvert the original meaning of
the term "reinsurance" and to deprive the contract of its chief
value. The losses are to be payable
pro rata with, in the
same manner, and upon the same terms and conditions, as paid by the
reinsured company under its contracts. This means that such losses,
payable
pro rata, are to be paid upon the same condition
as are the losses of the insurer payable under its contract. And
the liability of the reinsurer shall not be in excess of the
liability of the insurer under its original contracts, after
deducting therefrom any and all liability of other reinsurers of
the contract of the insurer or of any part thereof. It is the
ratable proportion for which the other reinsurers are liable, that
provision is made for deducting, and the liability of the insurer
means such liability after that deduction, and does not mean there
must be an actual payment of such liability by the insurer before
it can have any benefit of the contract of reinsurance which is
made with defendant.
Subdivision 10 of the contract does not result in any different
conclusion.
This subdivision does not and cannot mean that there is to be no
liability unless the reinsured should pay the loss sustained. The
reinsured company, under its provisions, is bound to forward to the
reinsuring company a statement of the date and the probable amount
of loss or damage, and it is provided that, after the reinsured
company shall have adjusted, accepted
Page 209 U. S. 337
proofs of, or paid such loss or damage, it shall forward the
proof of its loss and claim and a copy of the receipt taken for
payment. It means that, if the loss or claim has been in fact paid,
then a copy of the receipt is to be sent; but it does not mean that
there must be payment before any liability on the part of the
reinsuring company exists.
We do not think that the language of these two subdivisions was
intended to entirely nullify and tear up by the roots the
construction given to the contract of reinsurance for so many years
throughout the civilized world and upon which its chief value is
based. The nature of the contract is accurately described in its
commencement. It is described as a "compact of reinsurance," and
there has been no doubt as to the meaning of such contract for the
last two centuries. The judgment of the Court of Appeals is right,
and is
Affirmed.
