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Commissioner of Insurance v. Munich American Reinsurance Co.3/5/1999
1998); Mo. Rev. Stat. Sect. 375.1198 (Vernon 1991); R.I. Gen. Laws Sect. 27-14.3-34 (1994); S.D. Codified Laws Sects. 58-29B-86, 58-29B-87 (1996).
The argument that the reinsurer would receive an improper preference through setoff, while reasonable (see Bluewater Ins. Ltd. v. Balzano, 823 P.2d 1365, 1374 [Colo. 1992]), has been generally rejected in this country. It was rejected in 1998 when the Legislature added Massachusetts to the rest of the States having legislation allowing reinsurers to have setoffs in insurer insolvencies. St. 1998, c. 258, Sect. 1, amending G. L. c. 175, Sect. 180C. That statute, which was enacted after the questions were certified to us, expressly disclaims any retroactive application (St. 1998, c. 258, Sect. 2). It leaves the priorities of G. L. c. 175, Sect. 180F, intact and allows setoffs to reinsurers. The pattern of our cases concerning equitable setoffs, when one party is insolvent and common-law principles apply, is consistent with the public policy expressed in the new statute. See Transit Cas. Co, v. Selective Ins. Co., 137 F.3d 540, 544-545 (8th Cir. 1998) ("to allow set-off aligns Missouri . . . with almost all other states. . . . Indeed, since Transit's insolvency, Missouri has enacted a set-off provision, an indication that set-offs likely did not violate public policy prior to the enactment"); Stamp v. Insurance Co. of N. Am., 908 F.2d 1375, 1380 (7th Cir. 1990) ("if the large firms could not count on the netting of balances to satisfy obligations, they would be more likely to exclude smaller or tottering firms -- making new entry harder and precipitating failures of firms in difficulty"); Prudential Reinsurance Co. v. Superior Court, 3 Cal. 4th 1118, 1139-1142 (1992); Matter of the Liquidation of Midland Ins. Co., 79 N.Y.2d 253, 263-264 (1992).
The receiver relies on insolvency clauses in certain of the reinsurance agreements. An insolvency clause provides that, in the event of the ceding insurer's insolvency, reinsurance will be paid directly to the ceding insurer or its receiver "without diminution because of the insolvency of the Company." This provision is included in such an agreement "to overcome the holding of Fidelity & Deposit Co. v. Pink, 302 U.S. 224, 227-229 (1937), that a standard reinsurance treaty 'against loss' renders the reinsurer liable only upon proof of payment of losses by the insurer." Massachusetts Motor Vehicle Reinsurance Facility v. Commissioner of Ins., 379 Mass. 527, 534 n.10 (1980). Such a provision, in a statute or in a reinsurance agreement, is intended to increase the reinsured company's capacity to write insurance and is not designed to destroy a reinsurer's right of setoff. See G. L. c. 175, Sect. 20A (4); Prudential Reinsurance Co. v. Superior Court, supra at 1135; Matter of the Liquidation of Midland Ins. Co., supra at 263-264; Olson, Reinsurers' Liability to the Insolvent Reinsured, 41 Notre Dame Law. 13, 22-23 (1965-1966).
We answer both certified questions in the affirmative.
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