Allemannia Fire Insurance Company of Pittsburg, Pennsylvania v. Firemen's Insurance Company of Baltimore/Opinion of the Court
The only question before the court is as to the construction 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 fulfil 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 Home v. Mutual Safety Ins. Co. 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 F. Ins. Co. 56 N. Y. 104. The same doctrine is held in Consolidated Real Estate & F. Ins. Co. 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 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 F. Ins. Co., 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, Fed. Cas. No. 10,364, 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 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 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 Nat. Ins. Co. 5 Biss. 476, Fed. Cas. No. 2,499, 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 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 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.