Prudential Reinsurance Co. v. Superior Court

Adams, Duque & Hazeltine, Robert M. Mitchell, Margaret Levy, John L. Viola, Vicki W.W. Lai, F. Christopher Chrisbens, Wilson, Elser, Moskowitz, Edelman & Dicker, Patrick M. Kelly, Thomas R. Manisero, Blanc, Gilburne, Williams & Johnston, Gary R. Klouse, John A. Kronstadt, Sidley & Austin, Peter R. Chaffetz, Janet M. Letson, Hoon Chun, Mendes & Mount, Valerie A. Gordon, LeBoeuf, Lamb, Leiby & MacRae, Sanford Kingsley, Hufstedler, Miller, Kaus & Beardsley, John P. Olson, Arnold & Porter, Daniel M. Lewis & Gary P. Poon for Petitioner.

Bryan, Cave, McPheeter & McRoberts, Martin J. Foley, Phillip E. Stano, Daniel J. Conway, Richard E. Goodman, Jack H. Blaine, Craig A. Berrington, Ronald S. Gass and John J. Nangle as Amici Curiae on behalf of Petitioner.

No appearance for Respondent.

Rubinstein & Perry, Karl L. Rubinstein, Kathleen M. McCain, Melissa S. Kooistra, Dana Carli Brooks, John K. Van de Kamp and Daniel E. Lungren, Attorneys General, Edmond B. Mamer, Jack T. Kerry and Raymond B. Jue, Deputy Attorneys General, for Real Party in Interest.

Horvitz & Levy, Ellis J. Horvitz, Barry R. Levy, Lisa Perrochet, Spiegel & McDiarmid, Richard A. Brown, Spencer L. Kimball, Cynthia S.…

I concur in Justice Kline’s excellent dissenting opinion. I write separately, however, to make one additional point: the majority’s interpretation of Insurance Code section 1031 renders part of that statute meaningless, contrary to accepted principles of statutory construction.

Insurance Code section 1031 1 (section 1031) gives creditors of insurers in liquidation a general right of setoff subject to specified exceptions. The first paragraph of section 1031 states that, as between the insolvent insurer and any other person, mutual debts and credits shall be set off except in the situations described in subdivisions (a), (b), and (c). Only subdivision (a) of section 1031 is relevant here.

Subdivision (a) of section 1031 prohibits a setoff if the entity claiming the setoff is not entitled “to share as a claimant in the assets” of the insolvent insurer. In other words, only those entities that are entitled to share in the insolvent insurer’s assets may exercise the right of setoff. What, then, does the statute mean by an entitlement “to share as a claimant in the assets” of the insolvent insurer?

According to the majority, subdivision (a) of section 1031 means only that a…

Insurance Code section 620 (all further statutory references are to this code unless otherwise stated) defines a reinsurance contract as “one by which an insurer procures a third person to insure him against loss or liability by reason of such original insurance.” Typically, under a reinsurance contract, the primary insurer “cedes” a portion of the premiums for its policies, and the losses on those policies, to the reinsurer.

In a reinsurance transaction, policyholders pay premiums to their original insurer, who, in turn, pays a reinsurer a percentage of the initial premiums as consideration for reinsuring a specified part of the original risk. If, after a loss, the original insurer must compensate its policyholders, the reinsurer in turn indemnifies the insurer. The advantage of reinsurance is to secure to the original insurer adequate risk distribution by transferring a portion of the risk assumed to another insurer. (Semple & Hall, The Reinsurer’s Liability in the Event of the Insolvency of a Ceding Property and Casualty Insurer (hereafter Semple & Hall) (1986) 21 Tort & Ins.L.J. 407 [“A reinsurance agreement is one by which the reinsurer indemnifies the ceding…

The majority’s allowance of setoff—which elevates the economic interests of reinsurers over the legislatively preferred and *1145 equitably superior rights of policyholders, injured claimants and other creditors—results from a fundamental misunderstanding of the insurance insolvency statutes and contravenes clear legislative intent.

Permitting reinsurer setoff will result in the disallowance of many justifiable claims and have a ruinous effect on many individual policyholders, who reasonably believed they were protected against injury. As a consequence, policyholders, injured claimants and the public will bear costs of insolvency that tiie Legislature intended to impose, and which would much more fairly be imposed, on reinsurers, which were paid to assume the risk of the insolvency they are now unconscionably permitted to turn to their advantage. The majority opinion will also discourage self-regulation within the industry and exacerbate the growing problem of insurance insolvency now plaguing this nation.

I.

The majority says that “[t]he reinsurers prevail in this case because our Legislature has expressly and broadly recognized their right of setoff. . . .” (Maj. opn., ante,…