## Facts

- General Reinsurance Corporation (General) entered a reinsurance agreement (Agreement of Reinsurance No. 4191) with Medallion Insurance Company (Medallion) and related entities, including Consolidated Underwriters.
- The agreement contained an insolvency clause (Article IX) providing that, upon Medallion’s insolvency, reinsurance would remain payable “on the basis of the liability of the Company under the policy or policies reinsured, without diminution because of such insolvency,” and payable directly to Medallion or its liquidator/receiver.
- Article IX also required notice of claims and gave General the right to investigate claims and to intervene in proceedings adjudicating those claims to assert defenses available to Medallion or its receiver, but it did not grant General a right to settle claims on its own.
- On September 12, 1975, a Missouri state court declared Medallion insolvent, ordered liquidation, and appointed a receiver. C. Donald Ainsworth later served as successor receiver.
- Two insureds had unpaid liability claims that existed when Medallion went into liquidation:
  - P & NE: A tort judgment of $485,000 was entered against Medallion’s insured. Medallion’s policy limit for the claim was $100,000. The judgment creditors sought payment from General as reinsurer. General initially stated it could not settle the claim because of the insolvency clause, but later negotiated a $25,000 settlement directly with the judgment holders without involving the receiver.
  - B‑K: The claim was resolved by a court-approved settlement of $85,000. Medallion’s ancillary receiver paid $50,000, the insured contributed $10,000, and the insured’s excess insurer contributed $25,000.
- After the B‑K settlement, General paid the receiver $50,000, apparently treating that amount as the relevant insured liability.
- Ainsworth sued General in federal district court (diversity jurisdiction; Missouri law) seeking amounts measured by Medallion’s liability under the reinsured policies, including $75,000 on the P & NE claim (policy limits less retention) and $85,000 less retention on the B‑K claim.
- The district court entered judgment for the receiver, finding General’s unilateral actions did not reduce what it owed under the insolvency clause. General appealed.

## Issues

1. Whether the insolvency clause required General to pay the receiver based on Medallion’s liability under the reinsured policies “without diminution” due to insolvency, even when General negotiated a direct settlement with claimants or made partial payments.
2. Whether General’s contractual rights to investigate claims and intervene to assert defenses implied a right to settle claims directly with third-party claimants in a way that reduced the amount payable to the receiver.

## Decision

- The Eighth Circuit affirmed the judgment for the receiver.
- The court held that Article IX required payment to the receiver on the basis of Medallion’s liability under the reinsured policies, without reduction because of Medallion’s insolvency.
- General’s $25,000 direct settlement with the P & NE judgment holders did not change the measure of its obligation to the receiver; General remained liable for the reinsured amount tied to Medallion’s policy-limit liability (less retention).
- For the B‑K claim, General could not satisfy its obligation by paying only $50,000 based on its own view of Medallion’s share; the reinsurance was owed based on Medallion’s liability as reflected in the court-approved settlement (subject to the contract’s retention).
- The investigation and intervention rights in Article IX protected General’s ability to contest liability in adjudicatory proceedings, but did not authorize General to settle claims independently so as to reduce what must be paid to the receiver.

## Legal Principles

- When a reinsurance contract includes an insolvency clause requiring payment “on the basis of the liability” of the ceding insurer “without diminution because of such insolvency” and payable directly to the receiver, the reinsurer’s obligation is measured by the insurer’s liability under the underlying policy (within limits and subject to retentions), not by the reinsurer’s separate settlement terms or payment choices.
- Contract language granting a reinsurer the right to investigate claims and intervene to assert defenses does not, without more, create a right to control settlement or to negotiate direct settlements with claimants that alter amounts owed to the receiver.
- A reinsurer cannot bypass the receiver and thereby reduce reinsurance payable under an insolvency clause; reinsurance proceeds payable under such a clause are collected by the receiver as part of the liquidation estate for distribution under applicable liquidation rules.

## Conclusion

The Eighth Circuit held that General Reinsurance had to pay Medallion’s receiver amounts determined by Medallion’s liability under the reinsured policies, without reduction due to insolvency, and General’s unilateral direct settlement on one claim and partial payment on another did not discharge its obligations under the insolvency clause.


Ainsworth v. General Reinsurance Corporation, 751 F.2d 962 (1985)