Matter of Empire State Surety Co.

108 N.E. 825 | NY | 1915

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.]

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] [EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] This is an appeal by the superintendent of insurance as liquidator of the Empire State Surety Company from an order denying a motion to confirm a report of the superintendent of insurance which rejected as contingent certain claims presented in the liquidation of the Empire State Surety Company. Prior to December 16th, 1912, the Empire State Surety Company was a corporation duly authorized to carry on the business of liability insurance in this state. On December 16th, 1912, by an order of the Supreme Court, in a proceeding instituted under and pursuant to the provisions of section 63 of the Insurance Law, the Empire State Surety Company was ascertained and declared to be insolvent and the superintendent of insurance was directed to take possession of its property and liquidate its business. The report of the superintendent of insurance rejected as contingent fourteen claims under policies of liability insurance which had been filed in the liquidation proceeding. The respondents represent eight of these fourteen rejected claims. Upon the date of the entry of the order of liquidation these respondents held policies of liability insurance issued by the Empire State Surety Company. In these policies this company agreed to indemnify the assured therein:

"Against loss resulting from the liability imposed by law upon the insured for damages on account of death or bodily injuries suffered as a result of an accident."

The policies contained the following clause:

"No action shall lie against the company upon this policy unless brought by the assured to reimburse himself for the actual payment by him of money as follows: to wit, (a) any settlement of a suit upon a claim for damages brought by any of the persons, and under the circumstances, described in section I of the insuring clause, after final judgment in such suit or in the settlement of such claim, before or after suit or final judgment, upon the written authority of the company."

The policies also contained the following clause:

"CONDITION D. If thereafter any suit is brought against the Assured to enforce a claim for damages on account of an accident covered by this policy, the Assured shall immediately forward to the Company's Home Office every summons or other process as soon as the same shall have been served on him, and the company will, at its own cost, defend such suit in the name and on behalf of the Assured unless the company shall elect to settle the same or to pay the Assured the indemnity provided for in Condition A hereof."

There are three classes of claimants against the Empire State Surety Company referred to in the questions certified to this court. The first question refers to claimants against whom a judgment had been rendered prior to December 16th, 1912. The second question refers to claimants who made settlements of claims brought against them after the date of the entry of the order of liquidation, although the causes of action against the assured arose prior to that time and the defense of such actions had been assumed by the Empire State Surety Company. The third question refers to claimants who made settlements of claims brought against them or had judgments rendered against them after the date of the entry of the order of liquidation, although the accidents upon which the assured were sued happened prior to the date of the entry of that order.

Under these policies the Empire State Surety Company not only agreed to indemnify the assured against loss but in addition to this it agreed at its own cost to defend any suit brought against the assured unless it should elect to settle the same or to pay the assured the indemnity provided for in the policy. The policy, therefore, not only afforded insurance against loss, but also carried with it the obligation of the company to defend suits brought against the assured. This latter obligation the company, under the terms of the policy, was required to perform during the life of the contract. Failure to defend suits brought against the assured constituted a breach of contract upon its part. (Brassil v. Maryland Casualty Company, 210 N.Y. 235; St. Louis Dressed Beef P. Company v. Maryland CasualtyCompany, 201 U.S. 173.) Such a breach of contract on the part of the company released the assured from the agreement not to settle the claim without its consent, and was in effect a waiver of the condition of the policy that the company should only be liable after the assured had paid the judgment rendered against him. (St. Louis D. Beef P. Company v. Md. Casualty Company,supra.) As was said by Judge WERNER in Brassil v. MarylandCasualty Company (supra): "Its failure to continue the defense of these cases was in effect a breach of its contract." In St.Louis D. Beef P. Company v. Md. Casualty Company (supra) Mr. Justice HOLMES said: "The defendant by its abdication put the plaintiff in its place with all its rights. To limit its liability as if its only promise was to pay a loss paid upon a judgment is to neglect the meaning and purpose of the reference to a judgment, and even the words of the promise. The promise in form is to indemnify against loss by certain kinds of liability. The judgment contemplated in the condition is a judgment in a suit defended by the defendant in case it elects not to settle." (p. 182.) The cases which have decided that where the company has not been guilty of a breach of contract it is liable only to pay the assured the loss which has been sustained as a result of a judgment recovered against him (Brewster v. Empire StateSurety Company, 145 App. Div. 678; Saratoga Trap Rock Company v. Standard Accident Insurance Company, 143 App. Div. 852;McWilliams v. Home Insurance Company, 40 App. Div. 400) are without application when the company itself has been guilty of a breach of the contract or has failed to perform its conditions. In the present case, the Empire State Surety Company by reason of its insolvency was unable to perform its obligations under the contract to defend such suits as were brought against the assured and were within the policy. This failure upon its part to perform its contract was a waiver of the condition that it should only be liable to the assured for a loss resulting from the recovery of a judgment against him, and relieved the assured of the obligation of complying with the other terms of the policy, which, except for the failure of the company to perform its obligation, would still have been operative. When the Empire State Surety Company went into liquidation it became civilitermortuus, and was no longer able to perform its obligations under its contract. Its policyholders who had incurred liability to others, or had been sued by those making claims against them, and who owing to the default of the insurer had been obliged to defend such suits, became its creditors, and as such entitled to participate pro rata in its assets. (Carr v. Hamilton,129 U.S. 252, 256.) While the amount of the company's liability to these policyholders may not at that time have been liquidated, such liability had ceased to be contingent. When an accident against the consequences of which the assured is insured has happened and suit has been commenced against the assured, the insurer, under the terms of the policy, incurred the obligation of assuming the defense of such a suit. When the insurer violated the contract and refused to defend the suit or went into liquidation, thus making it impossible for it to undertake the defense of such suit, it incurred a liability which was not contingent. Where the insurer has failed to perform its contract and the accident against the consequences of which the assured is insured has happened, the liability of the insurer is certain. In such a case the liability ceased to be contingent although the amount of the liability may have been unliquidated. The insurer having failed to perform its obligation, the amount of the liability would not become fixed until the loss which the assured sustained was determined, but the liability of the insurer would be certain and not contingent from the moment that it failed to perform its obligation to defend the suit brought against the assured. It follows that when the order of liquidation was entered, the claims of all of the respondents had so far ripened and matured that they constituted certain and fixed liabilities of that company. Thus none of the claims of the respondents is contingent and these claims were improperly rejected by the superintendent of insurance. This case differs from those cases which involve the liquidation of claims against an insolvent estate, where such claims are capable of being liquidated in the liquidation proceeding itself. Here the claims of the assured, while not contingent, are not capable of being liquidated in this proceeding, but can only be reduced to liquidation as a result of the termination of the suit brought against the assured. This case presents greater difficulties, also, than are involved where the claimants against the funds of an insurance company are the holders of policies of life insurance, because every person's interest in life insurance is capable of instant and present valuation (People v. CommercialAlliance Life Insurance Company, 154 N.Y. 95, 99), whereas here the amount of the claims of the claimants cannot be liquidated until the suits which have been brought against such claimants have terminated. Such delay as is necessarily incident to the liquidation of such claims is for the protection of the interests of all classes of creditors and is necessary in order that the assets of the insolvent corporation shall be put in shape for distribution. The fact that delay may ensue cannot change or alter the character of the claims or convert a certain and fixed liability into a contingent liability. (People v. CommercialAlliance Life Insurance Company, supra, 100.) This case presents a situation different from that which was presented in People v. Metropolitan Surety Company (205 N.Y. 135) and People v.Metropolitan Surety Company (211 N.Y. 107, 118). In People v.Metropolitan Surety Company (205 N.Y. 135) there was no breach of the condition of the bond when the insolvency proceedings were commenced. The case of People v. Metropolitan Surety Company (211 N.Y. 118) involved the construction of a Federal statute. In neither of these cases was there a provision of the contract of the surety company involved, under which the surety company agreed to defend suits brought against the assured. So far as the decisions in those cases insist upon the necessity for recognizing a definite date upon which the rights and liabilities of all persons interested in the assets of the insolvent estate should be determined and fixed, they aid us in ascertaining the correct construction of section 63 of the Insurance Law. Section 63 of the Insurance Law (Cons. Laws, ch. 28, as amended) under which this proceeding was instituted provides as follows:

"The rights and liabilities of any such corporation, and of its creditors, policyholders, stockholders and members, and of all other persons interested in its assets, shall, unless otherwise directed by the court, be fixed as of the date of the entry of the order directing the liquidation of such corporation in the office of the clerk of the county wherein such corporation had its principal office for the transaction of business upon the date of the institution of proceedings under this section." (Laws of 1911, chapter 366.)

The order of liquidation that was entered December 16th, 1912, specified no other date as the date upon which the claims should be valued. The Special Term held that under the provisions of section 63 of the Insurance Law it was discretionary with the court to fix some date other than the date of the entry of the order of liquidation as the date upon which the rights and liabilities of certain claims under the policies should be fixed. We do not so construe the statute. The provision that "unless otherwise directed by the court" the rights and liabilities shall be fixed as of the date of the entry of the order directing liquidation, can be given effect if we regard it as conferring upon the court, to which the application for the order of liquidation is made, the discretionary power to fix at that time some date other than the date of the entry of the order of liquidation as the date upon which the rights and liabilities of the persons interested shall be fixed. The legislative intent disclosed by the use of these words was to vest the power in the court to which application was made to fix at the commencement of the proceeding some definite date in the future upon which the rights and liabilities of those having claims against the insolvent corporation should be determined. It was not designed by the use of this language that it should be discretionary with the court to classify and reclassify the claims against the insolvent estate, without regard to their relation to each other or to allow the valuation of such claims to be fixed with reference to the special facts embodied in each claim. Such an interpretation would be violative of the rule that "equality is equity" and would alter the relative rank of creditors as between themselves. (People v. MetropolitanSurety Company, 205 N.Y. 135.) The principle that equality is equity is especially applicable to the settlement of insolvent estates. Where equity acquires jurisdiction to distribute the assets of an insolvent fiduciary, distribution is made proportionately to all those having claims against the fund. The statute under which this proceeding is instituted was designed to facilitate, not to impede this equitable method of distribution. To construe it to mean that it conferred power upon the court to prescribe varying dates upon which the claims of creditors should be determined would defeat its true purpose. The principle that equality is equity is to be given effect only by adhering to a uniform rule by which the rights of all creditors are to be determined. The creditors of the insolvent estate and the proportionate share of the estate to which each is entitled must be determined by some uniform standard. Section 63 of the Insurance Law contemplates that this determination shall be made as of the date of the entry of the order of liquidation unless the court at the time that the order is made shall otherwise direct by specifying some other date as the date upon which this determination shall be made. Before the statute was amended so as to include the words "unless otherwise directed by the court" it was clear from the language of the statute as it then stood and from the decisions of the courts construing it that claims were to be fixed as of the date of the institution of the proceeding. (Matter of EquitableReserve Fund Life Association, 131 N.Y. 354; People ex rel.Attorney-General v. Life Reserve Association of Buffalo,150 N.Y. 94; People v. Commercial Alliance Life InsuranceCompany, 154 N.Y. 95, 98; People v. Metropolitan SuretyCompany, 205 N.Y. 135.) As amended the statute fixes as the date for the determination the date of the institution of the proceeding which is the date of the entry of the order of liquidation "unless otherwise directed by the court." The purpose of the amendment was not to depart from the rule of equality which always prevails in equity in the distribution of insolvent estates of fiduciaries and to permit the court to prescribe varying dates upon which the claims of different classes of creditors should be ascertained, but rather to permit the court, in the exercise of its discretion, to fix a date other than the date of the institution of the proceeding, upon which all claims against the insolvent estate should be determined. From what has been said it is apparent that the court has power to set a date other than the date of the entry of the order of liquidation within which claimants may perfect their claims, provided that such date shall be fixed at the time of the entry of the order of liquidation and shall apply equally to all who have claims against the insolvent estate. The last question certified requires us to determine whether the "items paid by the assured for services rendered by attorneys after the date of liquidation in the defense of actions covered by the policy (are) provable against the fund in the hands of the Superintendent of Insurance for distribution in this proceeding?" The policies of liability insurance issued by the Empire State Surety Company provided that if suits or legal proceedings were brought against the assured the surety company should have the conduct and control of the defense of such suits and assume the cost thereof. When the surety company went into liquidation it became impossible for it to keep this obligation, and its failure to perform conferred upon the assured the right to defend the suits brought against him and for the expenses necessarily and reasonably incurred in the defense of such suits, the assured became a creditor of the surety company and as such entitled to share in the assets in the hands of the superintendent of insurance. In defending such suits the assured was performing the obligation which, under the policy, the surety company was required to perform and which it had failed to perform. The services rendered in the defense of such suits were for the benefit of the fund in the hands of the superintendent of insurance. (Ross v. American Employers' Liability InsuranceCompany, 56 N.J. Eq. 41.) The services being necessarily rendered and being rendered for the benefit of the fund it is immaterial that they were rendered after the date of liquidation and the items for such services are properly chargeable against the fund.

It follows that the order appealed from should be affirmed, with costs, and that the first, second and third questions certified are answered in the affirmative. The fourth question is answered in the affirmative provided that such date shall be fixed at the time of the entry of the order of liquidation and shall apply equally to all who have claims against the insolvent estate. The fifth and sixth questions are answered in the affirmative.

HISCOCK, CHASE, MILLER and CARDOZO, JJ., concur; WILLARD BARTLETT, Ch. J., not voting; COLLIN, J., dissenting.

Order affirmed.