1. A reinsurance company made a participation contract with a
company engaged in the business of surety, fidelity, and burglary
insurance whereby the former assumed one-third of the liability on
risks written by the latter during a period of five years, and upon
annual accountings was to receive one-third of any profits, or pay
one-third of any losses, leaving, however, the management of the
business to the other without restriction. The second company being
unsuccessful, its receivers, after the five-year period, in winding
up its business cancelled its outstanding risks by returning
unearned premiums to policyholders.
Held that this was not
a breach of the contract, and did not relieve the reinsurer of its
liability to pay the insured company one-third of the losses
occurring after the five-year period on business written within it.
P.
269 U. S.
119.
2. The rule that the liability of a reinsurer is not affected by
the insolvency of the reinsured company, or the inability of the
latter to fulfill its own contracts with the original insured, is
applicable to a participation contract differing from customary
reinsurance in that the reinsurer, instead of receiving premiums
and paying its share of the losses, is to participate in profits
and losses. P.
269 U. S. 121.
293 F. 766 affirmed.
Appeal from a decree of the circuit court of appeals which
affirmed a decree of the district court (276 F. 949; 293
id. 764) in favor of the receivers of a Maryland insurance
company in a suit brought by them under the Trading with the Enemy
Act to reach impounded funds belonging to a foreign insurance
company, and for an accounting, etc.
Page 269 U. S. 119
MR. JUSTICE BRANDEIS delivered the opinion of the Court.
This suit for an accounting was begun in the Federal District
Court for Maryland on June 12, 1920, by the receivers of the United
Surety Company, a corporation of that state, against the Munich
Reinsurance Company, a Bavarian corporation. The controversy arose
out of a written agreement entered into by the companies in 1906.
There had been active litigation in the Maryland courts, where much
became
res judicata. See Munich Reinsurance Co. v.
United Surety Co., 113 Md. 200;
id., 121 Md. 479;
Poe v. Munich Reinsurance Co., 126 Md. 520. This suit was
then begun under § 9 of the Trading with the Enemy Act, October 6,
1917, c. 106, 40 Stat. 411, 419, as amended, because the receivers
sought to reach funds of the Munich Company in the possession of
the Alien Property Custodian. The district court, after careful
opinions, entered a decree for the receivers for $189,517.16 with
interest. 276 F. 949; 293 F. 764. The court of appeals affirmed it
without opinion. 293 F. 766. The appeal to this Court, allowed
January 7, 1924, was taken as of right under § 241 of the Judicial
Code. We find no reversible error. Two matters only require
mention. Neither presents a question federal in its nature.
The United engaged in the business known as surety, fidelity,
and burglary insurance. The Munich, by what is called a
participation contract, agreed with it to assume one-third of the
liability on every such risk written during a period of five years.
The management of the business was to be left to the United without
restriction. Upon an annual accounting, the Munich was to receive
one-third of any profits or pay one-third of any losses. A
Page 269 U. S. 120
decree entered against the Munich in the state court for losses
incurred during the five-year period had been satisfied. This suit
is for losses incurred after its expiration on insurance of the
United then still outstanding. The company had been unsuccessful.
The state court, after the expiration of the five-year period,
appointed receivers who proceeded to wind up the business. They
sought in vain to reinsure all outstanding risks. Then, with the
approval of the court, they secured, so far as possible,
cancellation of the outstanding insurance by returning unearned
premiums. The losses on account of which this suit was brought were
on risks entered into during the existence of the participation
contract and remaining unexpired upon its termination and which the
receivers did not succeed in getting cancelled.
The Munich argues that, by the course pursued, the assets were
wasted through returning the unearned premiums on good risks, and
that thus the poor risks were left unprotected; insists that it was
entitled to have all the insurance carried to its expiry, and
contends that the receivers, by securing the cancellation of much
of it for the purpose of winding up the business, committed a
breach of the participation contract which released it from further
liability. The contention is unfounded. The participation contract
did not restrict the discretion to be exercised by the United and
its receivers in the conduct of the business or in winding it up
after the termination of the agreement. The case of
Central
Trust Co. v. Chicago Auditorium Assn., 240 U.
S. 581, upon which appellants rely, is without
application.
There is a further contention that, because the United has not
paid to its creditors any part of the amounts due on its contracts,
and is likely to pay only 25 cents on the dollar, the Munich is
under no liability to pay to it anything on account of losses
incurred thereunder or, in any event, more than a
pro rata
share of the payments actually made by the United. The Munich
became a reinsurer.
Page 269 U. S. 121
The liability of a reinsurer is not affected by the insolvency
of the reinsured company or the inability of the latter to fulfill
its own contracts with the original insured.
Allemannia Fire
Insurance Co. v. Firemen's Insurance Co., 209 U.
S. 326. The participation contract differs from
customary reinsurance in this: the Munich, instead of receiving
premiums and paying its share of losses, was to participate in
profits and losses. The difference is not one which affected the
scope or character of the Munich's obligation.
Affirmed.
