Munich Re-Insurance Co. v. United Surety Co.

Urner, J., delivered the opinion of the Court. An agreement executed in the early part of 1906 between the Munich Re-Insurance Company and the 'nited Siretv Company, contained the fodowing clauses upon whose construction the questions raised by this appeal depend: “Article I. The ‘United’ agrees to cede to the ‘Munich,’ and the ‘Munich’ agrees to accept, a one-third (-J-) share of the amount insured or renewed under every bond, policy or guarantee which shall be issued by the ‘United’ in the territory of the United States, for indemnification against loss under the three classes of insurance known as Surety, Eidelity and Burglary Insurance.” “Should the ‘United’ decide at any time during the currency of this agreement to carry on any casualty or other business, it is agreed that the ‘United’ will offer to the ‘Munich’ a participation in such business under the terms of this agreement, and the ‘Munich’ has the right to a.ccept or refuse the participation in such business.” “Should the ‘Munich’ elect not to participate in such business, the income and proper charges connected with that business shall not be an item of the account with the ‘Munich’.” “Article Y. The ‘United’ shall charge the ‘Munich,’ and the ‘Munich’ shall be liable for the original commissions and brokerage paid by the ‘United,’ * * * and the ‘Munich’ further agrees that it shall be charged with one-third (Í) of all management and office expenses connected with the business included under this contract,” such expenses to “embrace a pro rata charge of a rental of ten thousand dollars ($10,000.00) per annum for the office of the ‘United’.” ⁴⁸² “Article YIII. The ‘United’ will render to the ‘Munich’ within two months after the close of each year a detailed account, and such accounts shall include all income and disbursements in accordance with the hooks of the ‘United,’ and shall he specific on the following' items: “Income: — 1. Gross premiums. 2.

Reserve for unadjusted claims at the end of the previous year. 3. Reserve for unexpired risks at the end of the previous year. 4. Interest received, excluding 4%% interest on the Capital Stock. “Disbursements: — 1. Return premiums and rebates. 2.

Re-insurance premium. 3. Claims paid, less salvage and re-insurance in other companies. 4. Commissions and brokerage allowed. 5. Salaries, fees and all other charges of officers, clerks, agents and other employees. 6.

Taxes, license and insurance department fees. 7. Rental of offices and all other disbursements, itemized as follows: (a) Advertising, (b) Printing and stationery, (c) legal expenses, (d) Miscellaneous expenses. 8. Premium reserve for unexpired risks. 9. Reserve for claims.

The above shall only include expenses incident to the Surety, Eidelity and Burglary Insurance business.” “Article IX. If the account provided for in the preceding article shows a profit, the ‘Munich’ shail receive one-third (-J) thereof as its share under the terms of this agreement. If the said account shall show a loss, the ‘Munich’ will pay one-third (^) of said loss to the ‘United’.” “The account shall he examined within one month after its receipt, and any balance due by either party shall he paid immediately upon receipt of confirmation by New York draft, or its equivalent.” “Article XII. This agreement shall take effect as of the second (2nd) day of January, 1906, and shall continue for a period of five (5) years from said date, and shall he tacitly renewed for further periods of five (5) years thereafter, unless written notice of a desire ⁴⁸³ to terminate same be given by registered letter from either party one year previous to the expiration of any term of five (5) years * * * The ‘Munich’ continuing to participate in all insurance coming within the terms of this agreement, granted or renewed by the ‘United’ during the currency of any notice of cancelment, and remaining liable for its share of the claims arising out of such insurance and out of insurance in force at the time of the notice being given until expiration of the liability thereon.” “Article XIII.

It is especially agreed that in case notice of termination is given by either party under this agreement, the ‘Munich’ shall receive as reimbursement for goodrwill five per cent. (590 °f its share of the net premiums, i. e., premiums less caneelments, of the last five years previous to the expiration of the notice of termination of this agreement.” “In case of notice of termination by either party, the accounts shall be made up not later than two years after the expiration of the notice. Such account shall not be charged with any premium reserve. , If claims are still outstanding, the proper reserve shall he charged, and after the final settlement of each of such claims, the ‘Munich’ will be paid any difference in its favor, and pay any difference in favor of the ‘United’.” The contract from which these clauses are quoted was sustained in 113 Md. 200 as against the effort of the Munich Company to have it annulled upon the theory that its execution by that company had been induced by fraudulent misrepresentations. It was found to be unnecessary to pass upon the question of fraud for the reason that the Munich Company was shown by the evidence to have waived the right of rescission it was then asserting.

The decree from which the former appeal was taken dismissed the bill of complaint filed by the Munich Company and provided for an accounting under the agreement as prayed by way of cross-relief in the United Company’s answer. Upon the affirmance of this ⁴⁸⁴ decree the cause was remanded for the further proceedings contemplated. In order to facilitate the accounting thus directed the parties entered into an agreement on November 19, 1910, by which they appointed the American Audit Company their agent “to examine the records, books and accounts of the United Surety Company, and therefrom to state an account in annual periods beginning 2nd January, 1906, and ending on January 1st, 1911, applying to the share of the Munich Be-Insurance Company in the business of the United Surety Company” under the contract in question. The agreement authorized the appointment of one delegate for each of the companies to assist in the accounting.

It was provided that all amounts passed by the Audit Company, and to which no objection was raised by either of the delegates, should be deemed to be accepted, by both parties. It was agreed, however, that the audit should not extend to outstanding liabilities for unexpired risks or claims not yet settled, which were reserved for future adjustment under the terms of the contract. The Audit Company’s report, which was to include a separate statement of the items in respect to which a difference of opinion might arise between the Munich and United Companies, was to be adopted as the basis of the accounting under the decree. The preliminary investigation for which the parties thus made provision was completed in December, 1911.

In the report then submitted the Audit Company stated that as the agreement by which it was appointed provided for a statement of the results of the examination in yearly periods it had taken no notice of the question of good-will mentioned in Article XIII of the participation contract, and that no reference was made in the report to Premium Deserves and Deserves for Claims because the agreement under which the auditing was done expressly left these items open for further adjustment. The delegates, Mr. Stuart S. Janney for the United, and Mr. Gustave A. Zieman for the Munich, agreed as to all items covered by the Audit Company’s accounting except those relating to a class of business conducted by the ⁴⁸⁵ United Company, known as “Excise Business,” involving the execution by it as surety of bonds given to tbe State of New York by licensed liquor dealers as indemnity against tbe violation of any of the laws regulating the sale of intoxicating liquors. The question between the delegates in the first instance was whether this business was included in the classes of insurance specified in the agreement. After some discussion, however, they instructed the Audit Company to eliminate the items relating to the excise business.

These items embraced the receipts of income from that source and- a comparatively small amount of expenses which could be identified as having been incurred in that particular connection. They did not include any part of the office and management expenses, commonly known as “overhead charges,” attributable to the prosecution of the United Company’s business as a whole. The Munich Company insisted that as the excise business proceeds were to be deducted from the income, with which the United Company was to be charged in the accounting, there should be excluded from the disbursements, for which it was to be credited, a proportion of the overhead charges in the ratio which the excise income bore to the entire volume of the company’s premium receipts. This claim was resisted by the United Company on the ground that such a deduction from the disbursements would be in excess of thq expenses for which the excise business was actually responsible.

It was the understanding of Mr. Zieman that the exclusion of the excise proceeds was made distinctly subject to an allowance for overhead charges, while on the other hand Mr. Janney understood that the elimination of the ascertainable excise items was agreed upon unconditionally and that the question of overhead charges was left open for future determination. In view of the inability of the delegates to agree upon this point the Audit Company prepared two sets of accounts, one including and the other excluding excise business. The report stated that it was impossible from the books of the United Company to separate ⁴⁸⁶ the overhead charges as to the different classes of business conducted, and for that reason statements were made out showing the totals of such charges for each year with a memorandum added as to the net amount of the three classes of business, viz: 1. Fidelity, Surety and Burglary; 2.

New York Excise; 3. Casualty. After the Audit Company had thus reported the parties proceeded with the accounting before the auditor, to whom the decree had referred the case for that purpose. The questions then open and in controversy were: 1.

The one already stated in reference to the excise business. 2. Whether premium reserves for unexpired risks and reserves for claims should be included or excluded as disbursements, and if included, whether interest was chargeable upon the Munich Company’s share of the apparent losses which the use of those items produced. 3. Whether an allowance should be made the Munich Company for good-will under Article XIII of the contract. The auditor’s report disposed of these questions as follows: 1.

The excise business was excluded and a pro rata deduction was made for overhead charges. 2. The premium reserve for unexpired risks and the reserves for claims were included as disbursements, and interest was charged on the yearly balances. 3. Ho allowance was made to the Munich Company for good-will. Exceptions were filed by the Munich Company to the action of the auditor in reference to the 2nd and 3rd points indicated, and the United Company excepted as to the disposition of the question first noted.

The Court below overruled all the exceptions and ratified the audit, and both parties have appealed. The issue raised as to the deductions on account of the excise branch of the business under investigation can give us no difficulty. While the nature of the liabilities incurred by the United Company in that connection would seem to place these undertakings in the category of surety business and therefore within the participation contract, yet, as clearly shown by the testimony taken before the auditor, the parties expressly agreed that the excise items of receipts and ex ⁴⁸⁷ penses should be excluded from the accounting, the only disagreement being in reference to the question whether the expense to be so deducted should include a proportionate part of the overhead charges. It is evident from the record that there is no available basis upon which the disbursements properly chargeable to the excise business can be estimated with any degree of accuracy.

This subdivision of the Surety Company’s activities undoubtedly had the benefit of the organization maintained for the promotion of its various corporate enterprises, but the books furnish no means of segregating the portion of the general management disbursements attributable to any particular department. The evidence tends to show that the excise business did not require the attention of the executive and office force to the same extent as the other lines of insurance in which the company was interested, and an apportionment of overhead charges according to the volume of the excluded business would appear to be liberal. It is, however, according to the testimony in the record, the only method by which a proper allowance for these expenses can be approximated under existing conditions. In our judgment the Court below correctly disposed of this exception.

The question as to the extent- to which the premium and claim reserves should be considered in the accounting requires a reference to the relations of the contracting companies to each other at the time of the preparation of the audit. So far as the annual accounts mentioned in Article VIII of the participation agreement are concerned it is distinctly provided that both classes of reserves shall be included. But there is an equally express provision in Article XIII that if notice of termination is given by either party, the account to be stated after the expiration of the notice shall not be charged with any premium reserve. The privilege of withdrawal was secured to the parties by Article XII, as above quoted, and was exercised by the Munich Company in the manner prescribed, with the result that the contract ceased to be operative, except as to business already subject ⁴⁸⁸ to its terms, when the original five year period expired on January 2nd, 1911.

The auditor’s account was prepared in December, 1912, nearly two years after the withdrawal of the Munich Company from the agreement. In consequence of the litigation between the parties no settlement ever occurred as to any part of the business- to which the contract applied. The present accounting must accordingly include the annual ascertainments of profit and loss required to be made during the currency of the contract and also the settlement for which it provides after the expiration of the notice of withdrawal. The audit as filed is composed of five annual statements in each of which both premium and claim reserves are charged as disbursements.

The statement for the final year of the contract will illustrate the method and theory of the accounting for all of the annual periods. It is as follows: Disbursements. 1. Return premiums and rebates............$102,552.66 2. Re-insurance premiums.................. 20,587.74 3.

Claims paid, less salvage, and re-insurance in other companies.................. 213,809.28 4. Commission and brokerage allowed........ 86,726.52 5. Salaries, fees and all other charges of officers, clerks, agents and other employees. 71,069.86 6. Taxes, licenses and Insurance Department fees.......'........................ 27,059.48 7.

Rental of offices...............$13,106.35 And all other disbursements itemized as follows: (a) Advertising expense.... 7,442.74 (b) Printing and Stationery. 2,433.50 (c) Legal Expense.......... 9,599.64 (d) Miscellaneous Expense.. 42,207.18 '- 74,789.41 8. Premium reserve for unexpired risks....... 185,698.88 9. Reserve for claims....................... 242,420.34 Total Disbursements..............$1,024,664.17 Less Excise overhead charges...... 22,379.48 Total Disbursements charged against the Munich Contract............$1,002,284.69 ⁴⁸⁹ Income. 1. Gross premiums.........................$454,844.42 2.

Reserve for unadjusted claims at the end of the previous year.................... 66,063.23 3. Reserve for unexpired risks at the end of the previous year......................... 254,951.96 4. Interest received, excluding 4%% interest on capital