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CALVERT FIRE INS. CO. v. SUSSEX MUT. INS. CO.

December 28, 1981

CALVERT FIRE INSURANCE COMPANY, Plaintiff,
v.
SUSSEX MUTUAL INSURANCE COMPANY, Defendant.



The opinion of the court was delivered by: BIUNNO

 
Re: Calvert Fire Ins. v. Sussex Mutual Civ. 80-4116

 The defendant, Sussex, has a motion set for September 28, to file a 3rd party complaint bringing in Horace Mann Insurance Co.

 The plaintiff, Calvert, has filed papers in opposition along with a cross-motion for summary judgment. The affidavits and exhibits filed deal with the underlying relationship and contract, prior history of other litigation, and tabulation sheets or schedules in connection with the transactions involved.

 The suit arises from a reinsurance pool organized by Newark Reinsurance Management Corporation (NRMC, (sometimes referred) to in filed papers as Newark Re).

 NRMC organized the pool by securing the adherence of a number of companies, each undertaking to reinsure some stated percentage of the insurance ceded to the pool for a particular pool year, a fiscal year running from July 1 to June 30. This case involves pool year 5, from 7/1/73 to 6/30/74.

 For that year, both Calvert and Sussex joined the pool by contract with NRMC. Calvert agreed to reinsure 10% of the risks on ceded business, and Sussex undertook 5%. The ceding companies, normally companies not members of the pool, would in effect transfer a particular property or casualty insurance policy to the pool, which would in return receive the premium and assume the risk. Also, only a part of a policy issued by the ceding company might be ceded, in which case the policy was in effect divided as to premium and risk.

 This kind of reinsurance arrangement has long been a part of the business of property and casualty insurance and is designed to back the insured risks with the strength of the members of the pool. Without reinsurance, a relatively small company issuing policies may sustain a number of large losses for it in a given year and be financially unable to make the payments, thereby putting all its outstanding policies in jeopardy, and no doubt reducing its ability to sell new policies.

 The whole system of insurance is based on the concept of spreading risks among policy holders, so that the aggregate of premiums received, less cost of acquisition and overhead expenses, plus earnings on investments, form a given company's fund from which those who sustain losses are indemnified. This same principle is merely extended by reinsurance to average the funds and the losses among a larger number of policy holders.

 A special rule applied under the reinsurance contract when a pool member ceded to the pool policies it had itself issued. In such instances, the ceding pool member dropped out of the pool for the ceded business. Both the premiums and the risks were divided among the other members of the pool, without participation by the ceding pool member, as though a separate and smaller pool had been formed for that category of ceded business.

 Thus, assume the pool had three reinsurers, each taking a 1/3 share. Assume that one of the three ceded one of its own policies to the pool. The premiums paid to the pool on that policy would be divided 50% each by the two remaining companies in the pool, their shares being equal, and if a loss on the ceded policy was sustained, each would be responsible for 50% of the loss on that policy.

 NRMC, the pool manager, had operated the pool from 1969 until 1975, when it went bankrupt. Before the bankruptcy, an equity receiver was appointed in Superior Court, Chancery Division, Horace Mann v. NRMC, Docket C-4065-74, in Somerset County. In December of the same year, it filed in bankruptcy. No history of the bankruptcy proceeding is provided in the papers on the pending motions.

 A word must be said about Horace Mann Insurance Company. It is indicated that when the members of the pool are all "admitted" companies, the ceding company is allowed not to establish its own reserves on policies issued by it and ceded to the pool, for the purposes of its annual report on the "convention statement" adopted by the National Association of Insurance Commissioners (NAIC). This convention form is used to report both for regulatory purposes by the various states, and for the purposes of federal income tax returns.

 The convention form had been used for many years before the decision in U.S. v. South-Eastern Underwriters Ass'n, 322 U.S. 533, 64 S. Ct. 1162, 88 L. Ed. 1440 (1944), which effectively overruled Paul v. Virginia, 75 U.S. (8 Wall.) 168, 19 L. Ed. 357 (1869) and, for the first time, held that the insurance business is "commerce" and so subject to federal regulation under the commerce clause. Congress responded by enacting the McCurran-Ferguson Act, 15 USC ยง 1011 et seq., by which it withdrew all limitations arising out of the commerce clause on the authority of the States to regulate the insurance business. For ...


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