Kemper Reinsurance Co. v. Corcoran, 79 N.Y.2d 253 (1992)
A reinsurer may offset amounts owed to it by an insolvent insurer under one contract against amounts it owes the insolvent insurer under a separate, unrelated contract, provided the debts are mutual and arise from contract.
Summary
Kemper Reinsurance Company sought a declaration that it could offset money it owed Midland Insurance Company (in liquidation) under a reinsurance contract against amounts Midland owed it for premiums under a separate contract. The New York Court of Appeals held that Insurance Law § 7427 authorized such an offset because the debts were mutual, even though they arose from different transactions. The Court reasoned that New York law and policy favored allowing such offsets to provide security to insurers and prevent precipitous failures.
Facts
Midland and its affiliates entered a reinsurance treaty with Kemper Re in 1979. In 1984, Midland issued an excess products liability policy to Esmark, Inc./International Playtex, Inc., and obtained a facultative contract with Kemper Re, reinsuring 75% of the risk. The Playtex contract included an insolvency clause obligating Kemper Re to pay reinsurance proceeds regardless of Midland’s insolvency.
Procedural History
In 1986, Midland was placed into liquidation. Kemper Re owed Midland approximately $750,000 in reinsurance proceeds under the Playtex contract, while Midland owed Kemper Re a similar amount in unpaid premiums under the treaty. Kemper Re sought to offset the debts, but the Superintendent of Insurance, as liquidator, objected. Kemper Re sued for a declaration permitting the offset. The Supreme Court denied Kemper Re’s motion for summary judgment, but the Appellate Division reversed, granting Kemper Re the right to set off the debts.
Issue(s)
1. Whether debts and credits must arise from the same contractual transaction to be considered “mutual” under Insurance Law § 7427, allowing them to be offset against one another in liquidation proceedings.
2. Whether the insolvency clause in the Playtex contract, requiring payment “without diminution because of such insolvency,” bars Kemper Re from exercising its right of offset.
3. Whether the debts were between the same parties and in the same capacity, considering that Midland’s affiliates had the right to cede risks under the treaty.
Holding
1. No, because the legislative history of Insurance Law § 7427, patterned after bankruptcy law, suggests that mutual debts need not arise from the same transaction.
2. No, because the insolvency clause was intended to overcome the common-law rule that a reinsurer only had to reimburse the liquidator for losses actually paid by the ceding company, not to destroy a reinsurer’s right of offset under Insurance Law § 7427.
3. Yes, because Midland was the only company that ceded risks under the treaty, and the liquidator stands in the shoes of the insolvent company.
Court’s Reasoning
The Court of Appeals reasoned that the term “mutual debts” under Insurance Law § 7427 requires that debts be “due to and from the same person in the same capacity.” However, the statute does not explicitly require the debts to arise from the same transaction. Referencing legislative history, the court noted the statute was modeled after bankruptcy laws, which allow offsets arising from different transactions. The Court distinguished prior New York cases cited by the Superintendent, finding them either involving fraud or situations where the parties were acting in different capacities (e.g., trustee vs. contractual debtor). The Court also emphasized that public policy favored allowing offsets as a form of security for insurers, particularly smaller ones. Quoting Scott v. Armstrong, the court stated that “only the balance, if any, after the set-off is deducted which can justly be held to form part of the assets of the insolvent.” As for the insolvency clause, the Court determined its purpose was to ensure the reinsurer paid the liquidator even if the insolvent insurer had not yet paid policyholders, and it was not intended to eliminate the right of offset. Finally, the Court found that the debts were indeed between the same parties and in the same capacity, because Midland was the only company that ceded risks under the treaty, and the liquidator’s rights are no greater than those of the insolvent company. The Court also noted that liquidation cannot place the liquidator in a better position than the insolvent company he takes over, authorizing him to demand that which the company would not have been entitled to prior to liquidation (see, Bohlinger v Zanger, 306 NY 228, 234).