The receivers of Trans-America Ins. Co., Inc., and insolvent domestic casualty insurance company, filed a petition in the Circuit Court of Montgomery County, In Equity, showing that Trans-America was the defendant in many law suits, and that Trans-America had a reinsurance treaty with Employers Reinsurance Corp. of Kansas City, Missouri, whereby Employers agreed to assume all liability for judgments against Trans-America in excess of $10,000. The petition further showed that Employers, while denying liability, had agreed to compromise the claims of Trans-America by paying $130,000 to the receivers, provided that this amount settled all claims against Employers by Trans-America, its receivers or any other persons, arising out of the reinsurance contract. The petition further alleged that the receivers felt it was to the best interest of the receivership and all the creditors that the offer be accepted, and asked the court to construe the reinsurance
The lower court approved the compromise. The three appeals here considered were consolidated in one record.
3 Div. 790
Melco System and Seven-Up Bottling Company of Birmingham, Incorporated, a Corporation, et al. v. Receivers of Trans-America Insurance Company, a Corporation
The Melco System is in the automobile leasing business and leased a vehicle to Seven-Up Bottling Co. This vehicle was involved in a collision whereby one Mrs. Mooreland was injured, and she sued for $150,000. Her case was pending when the decree in the instant case was rendered. Trans-America had insured Melco and its lessee, Seven-Up, for $100,000 and reinsured with Employers for all liability over $10,000.
Melco, by special appearance, objected to the acceptance of the $130,000 offer. Melco contended that it had a right to proceed against Employers and that the receivers had no right to compromise its claim against Employers. After a hearing and testimony, the court held that it was to the best interest of the receivership to accept the compromise offer of $130,000; that this amount would be settlement in full of all claims, including that of Melco, and that the sum, when received by the receivers, should be general funds of the receivership. Melco argues that the evidence is insufficient to support a finding that the compromise should be accepted; that the insolvency agreement keeps the reinsurance agreement from being an "ordinary" one, and that Melco is a third party beneficiary to the contract.
It seems to be agreed by all concerned that the reinsurance treaty alone would not permit any of the appellants to recover, because Employers did not become liable until Trans-America had paid a loss in full. It also seems to be agreed that the reinsurance treaty and the insolvency agreement must be construed together because they were executed on the same day and refer to the same matters. The insolvency agreement reads, in part, as follows:
The trial court followed cases which hold that ordinarily a contract of reinsurance is one of indemnity to the reinsured, and that a reinsurer is under no contract obligation to the original insured and does not become liable to him.
Melco agrees that there is no liability on Employers if the recovery be less than $10,000. In that event, Melco would be in the same position as some twenty-five hundred other creditors, but Melco insists that as far as the excess of $10,000, it should have a preferred position and not be left with its claim as a general creditor. Melco also urges that the court erred in holding immaterial the following rider about reinsurance on the policy:
Melco does not claim that this endorsement created any privity between Melco and Employers but, since Trans-America issued the policy with that endorsement and collected the premiums for Trans-America or its estate, it is not entitled to be enriched at the expense of Melco. The appellees insist that the evidence justifies the finding of the trial court and that there can be no privity between Melco and Employers.
The basic questions presented are:
(1) Is Trans-America, or third parties under insurance policies issued by it, entitled to the proceeds of the reinsurance contract;
(2) If Trans-America is entitled to the proceeds, are they general assets;
(3) If Trans-America is entitled to the proceeds of the reinsurance contract, is it to its best interest that the compromise offer be accepted?
Melco insists that it is a third party beneficiary to the contract between Trans-America and Employers because the contract was made for the benefit of the policy holders of Trans-America.
It is uniformly the rule in Alabama and most other jurisdictions that under an ordinary reinsurance contract, there is no privity between the reinsurer and the insured authorizing a recovery against the reinsurer by the insured. United States Fire Ins. Co. v. Smith, 231 Ala. 169, 164 So. 70, 103 A.L.R. 1468; Moseley v. Liverpool & London & Globe Ins. Co., 104 Miss. 326, 61 So. 428; Empire State Ins. Co. v. Collins, 54 Ga. 376; Stickel v. Excess Insurance Co. of America, 136 Ohio St. 49, 23 N.E.2d 839; Insurance Co. of Pennsylvania v. Park & Pollard Co., 190 App.Div. 388, 180 N.Y.S. 143; Id., 229 N.Y. 631, 129 N.E. 936; 13 Appleman Insurance Law and Practice Sections 7681, 7694; Richards on Insurance, Sec. 36, p. 124; 103 A.L.R. 1486 a.; 46 C.J.S. Insurance §§ 1220 b, 1232 a. A different rule obtains where the contract of reinsurance goes further than the "ordinary" contract as did the contract in United States Fire Ins. Co. v. Smith, supra. Thus we, as was the court in that case, are faced with the question of whether this policy was an "ordinary" one. Stripping the insolvency agreement to the barest essential words, it says that in case of insolvency of Trans-America, "* * * the assuming insurer (Employers) hereby agrees that * * * the reinsurance shall be payable by the assuming insurer (Employers) on the basis of the liability of the ceding insurer (Trans-America) under the contract * * * reinsured, * * * directly to the ceding insurer (Trans-America) or its liquidator, receiver or other statutory successor."
We cannot extend or enlarge a contract by implication to embrace an object different from that originally contemplated by the parties. "Courts cannot tamper with and change the terms of contracts, nor can they substitute as beneficiaries thereunder unnamed and unintended strangers who have nothing whatever to do with either the contracts or the contractors. To exercise such powers would be to usurp despotic authority." Goodman v. Georgia Life Ins. Co., 189 Ala. 130, 66 So. 649, 650. It is clear the Employers would not pay Trans-America until Trans-America had paid a claim exceeding $10,000 and then, Employers would reimburse Trans-America for the excess. But if Trans-America became insolvent, then Employers would pay the excess directly to Trans-America or its receiver. There is no mention, hint or suggestion that Employers has agreed to do more than indemnify Trans-America, or its receiver, or that this contract is made
The fact that Melco may have relied on the reinsurance rider would not entitle Melco or a judgment creditor of Melco to maintain an action directly against the reinsurer. This point, and the third party beneficiary contention, are covered in Greenman v. General Reinsurance Corp., 237 App.Div. 648, 262 N.Y.S. 569, 570, affirmed 262 N.Y. 701, 188 N.E. 128, where the court said:
See also, Gutride v. General Reinsurance Corp., 167 Misc. 608, 4 N.Y.S.2d 387; Sofia Bros. v. General Reinsurance Corp., 153 Misc. 6, 274 N.Y.S. 565, 569.
Having decided that the receivers of Trans-America are entitled to the proceeds under the reinsurance and insolvency agreements, the question recurs as to whether the proceeds are general assets or should Melco or its judgment creditor have a priority over the other creditors. We are convinced that the contract requires Employers to pay the money to Trans-America, or its receiver, and the money belongs to that company as a general asset. It does not receive the money as agent or trustee for any particular party or policy holder. A similar "priority" contention was considered in Sofia Bros. v. General Reinsurance Corp., supra, where the court said:
That brings us to the final question as to whether the compromise offer of Employers should be accepted. The evidence shows that the negotiations between the receivers and Employers covered quite a period of time and included many conferences, and finally, the $130,000 settlement offer was made on a "take it or leave it" basis.
We must assume that the trial court, in approving the compromise, took into consideration the probable validity of Employers' claims, the difficulty of enforcement by the receivers, the collectibility of any judgment recovered, the delay, expense and trouble of litigation, and the amount of the compromise offer as compared with the amount and collectibility of various judgments in favor of the receivers against Employers.
The evidence was taken orally before the trial court and we are not persuaded that the decree on the evidence was plainly or palpably wrong. We, therefore, must affirm those parts of the decree material to this appeal. 2A Ala.Dig., Appeal and Error. (2), (3).
Granville Turner was injured in a collision with a truck belonging to Covington County, driven by one McLaney, who was employed by the county. The county had insured the driver of the truck with Trans-America under a policy with limits of $50,000. Trans-America had reinsured all of its liability over $10,000 arising out of this policy with Employers. The premiums of Covington County to Trans-America, and Trans-America to Employers were paid. Turner sued McLaney. The Turner case was defended by counsel employed by Trans-America and Employers. Upon the trial, Turner received a verdict for $50,000.
When Turner was served as a "party respondent" to the application of the receivers to be permitted to compromise the claims against Employers, he filed pleas in abatement to the petition alleging that Employers had taken such an active interest in the Turner case that it had placed itself, by its own conduct, in privity with Turner. The court sustained the demurrer of the receivers and Employers to Turner's plea in abatement. Turner's demurrer to the petition was then overruled. A hearing was had, evidence taken ore tenus, and the court entered a decree approving the proposed settlement and declaring the proceeds of the settlement to be general assets of the receivership.
The basic questions presented by Turner's appeal are:
(1) Was the reinsurance contract between Employers and Trans-America one for the benefit of third parties so as to vest in Turner rights against Employers; and
(2) Do the provisions of Tit. 28, §§ 11 and 12 apply to the reinsurance contract?
We have answered the first question in the negative in 3 Div. 790, and what is said there applies equally to Melco and to Turner. The two sections of Tit. 28 could not apply in 3 Div. 790, but Turner insists that they are applicable in his case. The pertinent part of § 11 provides:
Section 12 provides a remedy in equity against the insurer for the injured party after recovering a judgment against the insured.
Applying § 11 to the instant case, it would read: "In respect to every contract of insurance made between an insurance company (Trans-America) and any person (McLaney) * * * by which such person (McLaney) * * * is insured against loss or damage on account of bodily injury * * * of any person (Turner) for which loss or damage such person (McLaney) is responsible, whenever a loss occurs on account of a casualty covered by such contract of insurance, the liability of the insurance company (Trans-America) shall become absolute, and the payment of said loss shall not depend upon the satisfaction by the assured (McLaney) of a final judgment against him for loss * * * occasioned by said casualty."
Turner would have us read the statute as follows:
Our statutes, §§ 11 and 12 of Tit. 28, were included in the 1923 Code to meet the decisions in Goodman v. Georgia Life Ins. Co., 189 Ala. 130, 66 So. 649, and Hollings v. Brown, 202 Ala. 504, 80 So. 792, wherein it was held that the injured judgment creditor could not proceed against the insurer when the policy required the insured to pay the loss before the insurer would become liable. Globe Indemnity Co. v. Martin, 214 Ala. 646, 108 So. 761. But, we do not understand that our statute undertook to do more than establish privity between the injured judgment creditor and the insurer. We have held that these sections are read into, and become a part of the insurance contract. Employers Ins. Co. of Alabama v. Brock, 233 Ala. 551, 172 So. 671. But, it has never been held in Alabama that these sections apply to a reinsurer. Reinsurance is not a new development in the insurance field. The Legislature might very well include the reinsurer in the statute, but that is a legislative matter, and until that is done, we are constrained to hold that the sections do not warrant a construction or interpretation that the Legislature intended to go beyond an insurer to include a reinsurer under an "ordinary" reinsurance agreement, which we have found the one in controversy to be. We think the statement in Gutride v. General Reinsurance Corp., 167 Misc. 608, 4 N.Y.S.2d 387, 389, is applicable here:
Appellant urges us to follow the case of Homan v. Employers Reinsurance Corp., 345 Mo. 650, 136 S.W.2d 289, 127 A.L.R. 163. Without a detailed discussion of that case, we think it sufficient to say that we agree with the trial court's opinion wherein he stated "An examination of the Homan case discloses that the reinsurance contract was entirely different from the one at bar and as held by the court in that case `the contract was not strictly a reinsurance contract.'"
Appellant also insists that the trial court erred in refusing to permit the witness Garrett to answer questions as to the estimated value of certain files or cases. Mr. Garrett was one of the attorneys for the receivers. He and an attorney for Employers went over 25 or 30 files for several days and each assessed a value to each file on a case by case basis. Finally, the attorney for Employers made the offer of
We think the trial court ruled correctly. We are cognizant of the rule cited by appellant that it is proper cross examination of an expert witness to inquire as to the grounds on which his stated conclusion rests. There is also the rule that the range of cross examination rests largely in the discretion of the trial court and his ruling thereon will not be revised on appeal unless it is made clearly to appear that error intervened to prejudice the objecting party. See Louisville & N. R. Co. v. Martin, 240 Ala. 124, 198 So. 141, for both rules. Here, Garrett was an expert witness. He was also one of the attorneys for the receivers. Some of the files he had testified about were cases in which suits were pending against Trans-America. If he were required to give testimony as to the value of any of those cases, and if he assessed any value above nuisance value, that would be an admission of liability, and that testimony, if later used in the trial of that case, would be highly prejudicial and injurious to the rights of the receivers. It is obvious that reason and common sense support the ruling of the trial court in sustaining objections to the questions to the witness Garrett. Moreover, appellant offered no evidence to show that the compromise offer was not reasonable, confining its efforts to show otherwise by the cross examination of the three witnesses of the receivers. We find no suggestion that injury resulted to appellant by reason of the court's rulings on the evidence.
The decree of the lower court is affirmed insofar as it relates to appellant.
In the compromise offer of Employers which the receivers sought to have approved by the Circuit Court in Equity, there was a provision that the $130,000 would be subject to a possible offset of approximately $9,000 owed by Trans-America to Employers should the court allow such an offset. The exact amount was $8,928.11 which was the sum of the unpaid premiums which Trans-America owned Employers prior to the receivership.
The lower court held:
It is from this part of the decree that Employers has appealed.
Appellant contends "that the statute, Tit. 7, § 350, which provides in effect that when two parties are indebted to each other, the debts may be set off against each other, applies here to entitle Employers to set off
But an important question here is when Employers became indebted to the receivers of Trans-America.
As already noted in the opening statement to these three cases, Employers did not become liable as reinsurer under the "reinsurance contract" until Trans-America had actually paid the loss. That was an absolute condition precedent to any liability on the part of Employers. It is the "insolvency agreement" which provides for payment to the receivers in case Trans-America becomes insolvent. But the "insolvency agreement" does not become operative until after the insolvency of Trans-America. It must follow then, that Employers was not indebted to Trans-America prior to the insolvency.
After insolvency is established, a creditor's claim, so far as the assets are concerned, gives him no more than the right to file his claim seasonably and to share ratably in their distribution. Farish v. Hawk, 241 Ala. 352, 2 So.2d 407; Oates v. Smith, 176 Ala. 39, 57 So. 438.
In the instant case, Trans-America owed the premiums prior to its becoming insolvent, but prior to that time, Employers was indebted neither to Trans-America nor the receivers under the agreements.
There is no Alabama case in point. The case most analogous is Woodlawn Federal Savings & Loan Association v. Williams, 237 Ala. 446, 187 So. 177, 183. In that case, among the assets coming into the hands of the liquidating agent of an insolvent bank were notes of a debtor secured by building and loan stock, pledged as collateral. Failing to collect from the debtor, the liquidating agent foreclosed the lien on the collateral and became the owner of the stock. The liquidating agent then sought to assert against the association, repurchase provisions in favor of the owner of the stock. The building and loan association was a depositor in the failing bank and claimed the right to set off the value of the stock against its still unpaid deposit. This court held that no such right of setoff existed. It was said:
* * * * * *
This seems to be in accord with the prevailing rule in this country. See Annotations, 71 A.L.R. 813; 128 A.L.R. 814.
To allow Employers this set-off would give Employers a preference over other creditors in that it would be receiving full payment of its claim while other creditors would be receiving only fractional payment.
The decree of the lower court is affirmed.
LIVINGSTON, C. J., and LAWSON and COLEMAN, JJ., concur.