G. C. Murphy Co. v. Reserve Insurance

OPINION OF THE COURT Murphy, P. J. Plaintiff G. C. Murphy Company (Murphy) brought this action against various insurers, reinsurers and brokers to recover $875,000 in unearned premiums. Defendant Reserve Insurance Company (Reserve) was served in this action in December of 1973. Since Reserve was an unauthorized foreign insurer, Special Term directed it to post an undertaking in the amount of $1,077,000 in accordance with section 59-a (subd 3, par [a]) of the Insurance Law. In compliance with this order, Reserve originally filed an undertaking of Continental Casualty Company (Continental) in the requisite amount. By order entered September 11, 1978, Reserve was permitted to substitute the undertaking of its affiliate, American Reserve Insurance Company of New York (American Reserve), for that of Continental. American Reserve’s undertaking provided, inter alia, as follows: "the condition of the above obligation is such that in the event the plaintiff recovers judgment against defendant, Reserve Insurance Company, in this action and defendant, Reserve Insurance Company pays the plaintiff the full amount of the judgment so rendered, then this obligation is to be void, otherwise to be in full force and effect; and the surety covenants, in that event it shall pay such final judgment or so much thereof as shall not have been paid by defendant, Reserve Insurance Company, up to but not exceeding the [237] amount of one million seventy-seven thousand ($1,077,000.00) DOLLARS.” In an order, entered May 16, 1979, the Circuit Court of Cook County, Illinois, appointed the Director of Insurance, State of Illinois, as the Rehabilitator of Reserve (hereinafter “the liquidator”). That same court, in an order filed May 29, 1979, placed Reserve in liquidation because of its insolvency. The latter order stated, inter alia, as follows: "G. That reserve insurance company, its officers, directors, agents and employees and all other persons be and are hereby enjoined and restrained from bringing or further prosecuting any action at law or in equity or other proceeding against said reserve insurance company or the Director of Insurance of the State of Illinois, or from interfering in any way with the Director’s conduct of the business of reserve insurance company, or from obtaining preferences, judgments, attachments, or liens or the making of any levy against said Company or its property and assets while in possession and control of the Director, or from in any way interfering with the Director of Insurance in his possession or control of or in his title, right and interest to the property, books, records and all other assets of the said reserve insurance company. “H. That all persons be and are hereby enjoined and restrained from asserting any claim against the Liquidator or reserve insurance company except insofar as such claims arise in the liquidation proceedings of reserve insurance COMPANY. "I. That all persons, including policyholders of reserve insurance company and all persons asserting claims against such policyholders, be and are hereby enjoined from instituting or pursuing any action or proceeding in any court or before any administrative agency, including boards, commissions, panels or other tribunals administering workmen’s compensation, occupational diseases, malpractice, arbitration or similar laws of the State of Illinois or of any other state or of the United States, which seeks in any way, directly or indirectly to contest or interfere with the Liquidator’s exclusive right, title and interest to funds, recoverable under treaties and agreements of reinsurance heretofore entered into by reserve insurance company as the ceding insurer, or otherwise”. On May 3, 1979, Special Term directed Reserve to submit additional undertakings because American Reserve’s under [238] taking was in excess of 10% of the surplus to policyholders (Insurance Law, §§ 47, 315). On May 14, 1979, Murphy moved to reargue. It sought a further order enjoining Reserve from removing any property that had been left with American Reserve. It also requested that Reserve deposit additional property as security. There is some indication that Reserve’s counsel may have forwarded the papers on this first motion to the liquidator’s counsel in Illinois. The liquidator did not appear on this first motion. On or about July 13, 1979, Murphy made a second motion to join American Reserve as a party defendant. A Special Deputy Liquidator submitted an affidavit that neither the liquidator nor his counsel had been served with the second set of motion papers. On the basis of his limited information, the Special Deputy Liquidator stated that the liquidator would "likely” oppose the second motion. He requested a continuance of 30 days so that the liquidator could prepare his case adequately. In passing, it should also be observed that the State of New York Department of Insurance was served with the second set of motion papers but it did not respond on that motion. Reserve, through its private counsel, made the third motion on August 7, 1979 for dismissal of the action as against it or, alternatively, for a stay of that branch of the action. There is no indication in the record that the Liquidator was served with the third set of motion papers or that the motion was made on the Liquidator’s behalf. In an order, entered November 20, 1979, Special Term (i) granted the first motion only to the extent of finding that Reserve’s property, left with American Reserve, was available as part of the security, (ii) granted the second motion joining American Reserve as a party, and (iii) denied the third motion for a dismissal or a stay of the action as against Reserve. Once the Director of Insurance, State of Illinois, had been appointed Rehabilitator and Liquidator of Reserve, he should have been formally served with all the papers that are subject to this appeal. Special Term should have granted a continuance to permit proper service upon the liquidator and to allow him to have an adequate opportunity to respond in this action. Nonetheless, an attorney for the liquidator appeared at the "oral” argument of this appeal and he joined in the position previously taken by the private counsel for Reserve. Since the attorney for the liquidator did not claim any prejudice, the merits of this appeal will be considered. [239] Both New York and Illinois have adopted the Uniform Insurers Liquidation Act ("Uniform Act”; Insurance Law, § 517 et seq.; Ill Rev Stat, ch 73, § 833.1 et seq.). Under subdivision 2 of section 519 of the Insurance Law New York must recognize the right of the liquidator, as the domiciliary receiver (Ill Rev Stat, ch 73, § 833.1, subd 12), to seek a stay of the proceedings against Reserve (Ill Rev Stat, ch 73, § 801) and to take possession of its assets. (Ill Rev Stat, ch 73, § 833.8). Nevertheless, the portion of the May 29, 1979 order of the Circuit Court, quoted above is drawn in terms that are very sweeping. The New York and Illinois statutes recognize the right of an ancillary receiver to take possession of and liquidate "special deposit claims” (Insurance Law, § 517, subd 10; § 519, subd 2; § 522, subd 3; Ill Rev Stat, ch 73, § 833.1, subd [8]; §§ 833.6, 833.8). Had an ancillary receiver been appointed in New York, Murphy would have been permitted to pursue, what is arguably a "special deposit claim” (cf. Commissioner of Ins. v Equity Gen. Ins. Co., 346 Mass 233; Collins v Dacus, 211 Ga 779), before the ancillary receiver. However, since the New York Superintendent of Insurance has inexplicably failed to seek the appointment of an ancillary receiver (Insurance Law, § 519, subd 1), Murphy must pursue the instant claim against the liquidator in Illinois (Vlasaty v Avco Rent-A-Car System, 60 Misc 2d 928, 930, 931; Zullo Lbr. v King Constr., 146 NJ Super 88). In order to protect against the remote possibility that Murphy’s claim against Reserve is not fully adjudicated in the Illinois courts, Reserve’s motion will be granted only to the extent of staying this action as against it. In view of this stay, Murphy’s motions are denied as academic. Moreover, it is thus unnecessary for this court to reach the issues of whether (i) American Reserve’s undertaking under section 59-a (subd 3, par [a]) of the Insurance Law is a "special deposit claim” and, if it is, (ii) the undertaking covers any judgment obtained in the receivership proceedings rather than in the instant action (see 20 Appleman, Insurance Law and Practice § 11491, at p 339—a judgment against a principal may be a condition precedent to recovery on a bond). Murphy’s reliance upon Dean Constr. Co. v Agricultural Ins. Co. (42 Misc 2d 834, affd on other grounds 22 AD2d 82) would appear to be misplaced. In Dean, Empire Mutual Insurance Company had filed a bond under subdivision 3 of section 59-a [240] of the Insurance Law in order to defend in that case. Subsequently, Empire Mutual was dissolved in Pennsylvania, a nonreciprocal State under the uniform act. Empire Mutual then moved for summary judgment dismissing the Dean action as against it on a theory of abatement. The Second Department ruled that, under the uniform act, the common-law rule of abatement was only extended to reciprocal States. Consequently, Empire Mutual’s motion was denied and that defense was dismissed. It should be emphasized that the Second Department never addressed the issue of whether the claim against Empire Mutual must be pursued under the uniform act in New York or whether it could also be pursued in that action. Justice Breitel, writing for the First Department in Kelly v Overseas Investors (24 AD2d 157, revd on other grounds 18 NY2d 622) disagreed with the holding in Dean that, because Pennsylvania was a nonreciprocal State, its Insurance Commissioner could not sue in New York for claims vested in her pursuant to the Pennsylvania statutes. The Court of Appeals in Kelly agreed with Justice Breitel’s reasoning that the Insurance Commissioner for Pennsylvania had the capacity to sue in New York but that no cause of action was stated in the complaint. In reversing, the Court of Appeals gave the Insurance Commissioner leave to replead. It may be fairly stated that Dean’s precedential value has been seriously undermined by Kelly. In any event, Dean did not squarely address the problems presented on this appeal. For the foregoing reasons, the order of the Supreme Court, New York County (Stecher, J.), entered November 20, 1979, which, inter alia, added American Reserve as a party and denied a stay of the action as against Reserve, should be modified, on the law, and Reserve’s motion should be granted to the extent of staying the action as against it with leave given to Murphy to file its claim against the Illinois Liquidator and Murphy’s motions should be denied as academic, without costs.