California Supreme Court Upholds Principle Of Reinsurance Offset Ending Long Dispute.

The long battle over the principle of offset of reinsurance proceeds against money owed a reinsurer by an insolvent insurer appears to be settled in California "once and for all." according to Ronald Gass, assistant general counsel of the American Insurance Association.

The dispute raged over the demand by the liquidator of Mission that reinsurers pay over monies that were owed to the defunct carrier on reinsurance claims. The reinsurers declined to do that unless premiums and other monies owed them by Mission was used as an offset.

A Los Angeles Superior Court had ruled that Prudential Reinsurance Co. could not apply the setoff principle. However, the California Court of Appeal, in a decision in 1989, reversed the Superior Court finding, unanimously. It ruled that Prudential could liberally setoff reinsurance debts and credits where reciprocal reinsurance contracts had been in force.

Commenting on the Court of Appeal finding in its "Reinsurance & Regulatory Report" in its May. 1992 edition, Buchalter, Memer, Fields & Younger. P.C., a California law firm which operates on a partnership basis in N.Y., said that the ruling essentially expanded setoff rights to be roughly equal to those enjoyed by reinsurers prior to liquidation.

Gass. noting the decision of the California Supreme Court handed down on November 30. said "The court reaffirmed the vital role that setoff plays in spreading risk, securing contact performance, and stabilizing insurance markets."

Three influential courts, California, New York, and Illinois federal court, have all upheld the right of setoff in liquidation proceedings, according to Gass "The California decision underscores that there are sound public policy reasons favoring setoff." It also demonstrates, Gass said, that the current position of the National Association for Insurance Commissioners restricting the right of setoff in...