Hicks v. Poe

Background

Receivers for a Maryland surety and fidelity insurer sued a Bavarian re-insurance company after disputes arose from a 1906 participation agreement. Under that deal the foreign company agreed to take one-third of liabilities on risks written during a five-year period, with annual sharing of profits or losses and management left to the Maryland company. After the five years ended the Maryland company failed, receivers were appointed, and they tried to cancel unexpired policies where possible while returning unearned premiums; some policies remained in force and led to the disputed losses. The receivers sued in federal court in 1920 to reach funds of the foreign company then held by the Alien Property Custodian, and lower courts awarded the receivers money, which the Court of Appeals affirmed.

Reasoning

The Court addressed whether the receivers’ winding-up actions or the insolvency of the Maryland company freed the foreign company from its contractual share of losses. The opinion explains that the participation contract left business management and winding-up decisions to the Maryland company and its receivers, so cancelling policies with court approval did not breach the contract. The Court also held that becoming a re-insurer means the foreign company’s liability is not negated by the primary insurer’s insolvency. The difference that the foreign company shared profits as well as losses did not change its obligation to pay its share of losses.

Real world impact

The ruling means foreign reinsurers that agreed to share losses remain responsible even if the original insurer becomes insolvent, and receivers may cancel unexpired policies with court approval during winding up. The award to the receivers was affirmed, and the foreign company must cover its contractual share of the unpaid losses.