New York Law Review

Tag: insolvency

  • Ragins v. Hospitals Ins. Co., 22 N.Y.3d 1021 (2013): Interpreting Excess Insurance Policy Coverage for Post-Judgment Interest

    Ragins v. Hospitals Ins. Co., 22 N.Y.3d 1021 (2013)

    An excess insurance policy that covers “all sums” exceeding the primary policy’s limit encompasses post-judgment interest, obligating the excess insurer to pay interest accruing after the primary insurer has paid its policy limit, even if the primary insurer is insolvent.

    Summary

    Ragins sued Hospitals Insurance Company (HIC), asserting HIC owed interest on a malpractice judgment under an excess insurance policy. The primary insurer became insolvent and its liquidator paid the $1,000,000 primary policy limit. Ragins argued this triggered HIC’s excess policy. The Appellate Division sided with HIC. The Court of Appeals reversed, holding the primary insurer’s payment triggered HIC’s duty to cover all remaining amounts, including interest. The court reasoned the excess policy covered “all sums” exceeding the primary limit, which includes interest, and rejected HIC’s argument that it was being forced to “drop down” to cover the primary insurer’s obligations.

    Facts

    Ragins was subject to a medical malpractice judgment. Ragins held a primary insurance policy with a $1,000,000 limit and an excess policy with HIC. The primary insurer became insolvent, and a liquidator was appointed. The liquidator paid the $1,000,000 limit of the primary policy. Post-judgment interest continued to accrue on the remaining balance of the judgment. HIC refused to pay the post-judgment interest, arguing it was not obligated under the excess policy.

    Procedural History

    Ragins sued HIC for breach of contract in Supreme Court. The Supreme Court’s decision is not detailed in this opinion. The Appellate Division held that HIC was not obligated to indemnify Ragins for the unpaid interest and remitted the matter to the Supreme Court for entry of a judgment. The Court of Appeals granted Ragins leave to appeal.

    Issue(s)

    Whether an excess insurance policy obligates the excess insurer to pay post-judgment interest on a judgment against the insured, where the primary insurer has paid its policy limits, but additional interest has accrued?

    Holding

    Yes, because the plain language of the excess policy requires HIC to cover any professional liabilities, including interest, above the primary policy’s $1,000,000 limit once that limit has been paid.

    Court’s Reasoning

    The Court of Appeals focused on the language of both the primary and excess insurance policies. The court noted that the primary policy’s “supplementary payments” section only obligated the primary insurer to pay post-judgment interest until it had paid its $1,000,000 liability limit. The excess policy stated that HIC would pay “all sums” exceeding the primary policy limit that Ragins was legally obligated to pay as damages. The court reasoned that the term “sums” included interest. The court stated that “damages” retained its most common meaning, namely, “[t]he sum of money which the law awards or imposes as pecuniary compensation… for an injury done or a wrong sustained.” The court also stated, “even if there were any ambiguity as to whether the covered sums under the excess policy include interest, that ambiguity must be construed against HIC and in favor of plaintiff, thus providing coverage for that amount under the excess policy”. The court distinguished the case from Dingle v. Prudential Prop. & Cas. Ins. Co., noting that unlike the policy in Dingle, the primary policy here did not expressly cover interest above the policy’s liability limit, and the excess policy plainly covered “all sums” in excess of the primary policy’s limit, necessarily including interest. The court rejected HIC’s argument that it was being forced to “drop down” and cover the insolvent primary insurer’s obligations, stating that HIC’s responsibility for the remaining interest was simply its obligation under the plain language of the excess policy.

  • Kemper Reinsurance Co. v. Corcoran, 79 N.Y.2d 253 (1992): Reinsurer’s Right to Offset Debts in Insolvency

    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).

  • Abraham v. New York Offset Co., 21 N.Y.2d 40 (1967): Validity of Judgments Against Insolvent Corporations

    21 N.Y.2d 40 (1967)

    A judgment obtained through a vigorously contested action against an insolvent corporation is not automatically invalid under Section 15 of the Stock Corporation Law; the prohibition applies primarily to judgments suffered by consent or connivance to give a creditor a priority.

    Summary

    Abraham sued New York Offset Co. to recover loans. The company argued the funds were an investment, not a loan, and a judgment would violate Section 15 of the Stock Corporation Law given its insolvency. The referee found the funds were a loan, and the Appellate Division affirmed. The Court of Appeals held the statute, concerning transfers of property to stockholders for debt payment when a company is insolvent, does not automatically invalidate a judgment from a contested action. It mainly applies to judgments by consent or connivance meant to give a priority.

    Facts

    Abraham claimed that they loaned money to New York Offset Co., which the company denied. The company argued Abraham was actually an investor, and they were insolvent, which would make a judgment for Abraham invalid under Section 15 of the Stock Corporation Law. The company argued the transfers would constitute a preference to a stockholder over other creditors during insolvency. The lower court determined the funds advanced were a loan and not an investment. The defendant corporation argued it was undisputed the corporation was insolvent.

    Procedural History

    The Special Referee ruled in favor of Abraham, finding that the money advanced was a loan. The Appellate Division unanimously affirmed the judgment. The case then went to the New York Court of Appeals.

    Issue(s)

    Whether a judgment obtained through a vigorously contested action against an insolvent corporation, on the merits of whether a plaintiff was a creditor or stockholder, is invalid under Section 15 of the Stock Corporation Law.

    Holding

    No, because Section 15 applies primarily to judgments suffered by consent or connivance intended to give a creditor a priority, not to judgments resulting from contested litigation on the underlying debt.

    Court’s Reasoning

    The court reasoned that Section 15 of the Stock Corporation Law uses the term “judgment suffered” in conjunction with other acts suggesting the creation of favorable priority for the stockholder or officer, such as ‘payment made, judgment suffered, lien created or security given”. The term “judgment suffered” in this context means by the consent and connivance of the corporation to give the plaintiff a priority.

    The court distinguished this case from situations where a corporate officer or stockholder attempts to gain an improper preference through a warrant of attachment or other means outside of a fully litigated action. The court noted that the defendant affirmatively pleaded facts which it thought brought it within section 15 and had the burden of establishing this defense. The court relied on Throop v. Hatch Lithographic Corp., 125 N.Y. 530, distinguishing it because that case concerned a warrant of attachment and not a fully litigated claim. It said the warrant of attachment was “equivalent” to “an assignment or transfer by… voluntary action.”

    The court also cited Kingsley v. First Nat. Bank of Bath, 31 Hun 329 which states that an action to establish rights is not interdicted by the statute “for that may be necessary to secure an adjustment and liquidation of a disputed demand”.

    The court also cited Welling v. Ivoroyd Mfg. Co., 15 App. Div. 116, affd. 162 N.Y. 599, holding that an officer’s assignee has a right to sue upon a proper cause of action and obtain judgment; the remedy, it was said, must be addressed to the levy. Thus, the court focused on the validity of the judgment itself, separate from any subsequent enforcement efforts that might create an improper preference.