XXIX. REINSURANCE. 1. SPECIAL MATTERS RELATING TO REINSURANCE CONTRACTS. (a) Risks covered. (b) Extent of liability. (c) Defenses open to reinsurer. (a) Risks covered. An insurer cannot stipulate for indemnity by reinsurance against a risk which he has not assumed (Commonwealth Ins. Co. v. Globe Mut. Ins. Co., 35 Pa. 475); but this does not mean that the risk assumed by the reinsurer must be coextensive with the risk covered by the original policy. Though a contract of reinsurance applies to the same subject-matter as the original policy, and relates to perils of the same character, it may be for a less, though not a greater, risk (London Assur. Corp. v. Thompson, 62 N. E. 1066, 170 N. Y. 94). So when the original insurance was by a time policy, reinsurance for a specific voyage the ordinary length of which was less than the time originally insured is valid (Philadelphia Ins. Co. v. Washington Ins. Co., 23 Pa. 250). As illustrative of the rule, reference may also be made to Milwaukee Mechanics' Ins. Co. v. Palatine Ins. Co., 128 Cal. 71, 60 Pac. 518, where the original insurer had issued a policy on certain property for one year, the risk running from June 20, 1894, to June 20, 1895. Thereafter it applied to defendant company for a policy of reinsurance covering the period from June 19, 1894, to June 19, 1895. The property burned June 20, 1895. It was held that though the general custom was to issue reinsurance policies for the same period of time covered by the original policy, still such fact would not operate as against the plain letter of a contract prescribing a definite period. of time; hence the reinsurer was not liable for the loss. There being no general form of marine insurance policy, and reinsurers not always assuming the same risk as the original insurers, it cannot be presumed that the risk covered by a reinsurance was the same as covered by the original policy. Insurance Co. of State of Pennsylvania v. Telfair, 61 N. Y. Supp. 322, 45 App. Div. 564. A reinsurer is not liable to the insurer for a loss which, unknown to either paty, occurred before the reinsurance was effected, if the parties contracted with reference to a custom that reinsurance took effect from the time when it was granted (Union Ins. Co. v. American Fire Ins. Co., 107 Cal. 327, 40 Pac. 431, 28 L. R. A. 692, 48 Am. St. Rep. 140). Where the reinsurer by contract assumed the "trade, contingent liabilities, and good will" of a company retiring from business, and agreed to pay the losses and reap the advantages which were "to accrue" from its assumption of the losses of the other company, while the company going out of business agreed to discharge its "outstanding obligations," the reinsurer was not liable for losses through fires before the contract was made (Olsen v. California Ins. Co., 11 Tex. Civ. App. 371, 32 S. W. 446). The reinsurance may, however, cover risks to be taken by the original insurer in the future. Thus, in Boston Ins. Co. v. Globe Fire Ins. Co., 174 Mass. 229, 54 N. E. 543, 75 Am. St. Rep. 303, it was held that a policy of reinsurance, by which a company undertakes to indemnify another company to the extent of one-half its losses by fire on marine risks it then holds or may thereafter take during the life of the contract, is not a wager policy, but is governed by the laws and usages of marine insurance, and is in the nature of an open policy, which, by such laws and usages, is valid; nor is its validity affected by the fact that it contains no stipulation for notice by the reinsured of the subsequent policies it issues. In Imperial Fire Ins. Co. v. Home Ins. Co., 68 Fed. 698, 15 C. C. A. 609, 30 U. S. App. 409, the contract of reinsurance provided that the company should be liable only for such proportion of the loss as the sum insured bore to the cash value of the whole property. Another condition provided that it should be subject to the same. risks, conditions, valuations, indorsements, assignments, and mode of settlement as were or should be assumed by the insured company, and the loss should be payable pro rata at the same time and in the same manner as by that company. It was held that policies subsequently issued by the insured company which did not contain the coinsurance clause were covered by the policy of reinsurance. An insurance company having risks on a vessel, her cargo and freight, made application for reinsurance as follows: "Reinsurance is wanted by the M. Insurance Company for $ on cargo on board of the ship G., on the excess of insurance which [insurer] may have over $50,000, not exceeding $15,000." It was held that the policy issued on such application attached to any excess over $50,000 which the plaintiffs had at risk on the cargo alone, and not on vessel, freight, and cargo, and, as the original insurer's risk on the cargo alone at no time amounted to said sum, there could be no recovery (Mercantile Mut. Ins. Co. v. State Mut. Fire & Marine Ins. Co. of Pennsylvania, 25 Barb. [N. Y.] 319). Under a contract of reinsurance confining the location of the risk within certain limits, there can be no recovery for a risk located outside of said limits, though it is erroneously stated to be within said limits in the schedule of risks. So where the contract for reinsurance distinctly provided for reinsurance of policies on risks. in New York state only, and the schedules describing the risks to be reinsured embraced certain risks elsewhere than in New York, as well as those in that state, the policies of reinsurance, though they in terms covered the risks which were set forth in the schedules, only covered the risks in New York state (London & L. Fire Ins. Co. v. Lycoming Fire Ins. Co., 105 Pa. 424). A warehouse five stories high, with a common outer wall and two partition walls dividing the building into three compartments on each floor, with doors eight feet square in each of the walls between the several compartments in each of the five stories, the entire structure being under one management and devoted to the same use, is but one building, within the meaning of a reinsurance compact, which limited the liability of an insurance company to $5,000 in any one building or risk. German-American Ins. Co. v. Commercial Fire Ins. Co., 95 Ala. 469, 11 South. 117, 16 L. R. A. 291. (b) Extent of liability. The contract of reinsurance is a contract of indemnity, and binds the reinsurer to pay to the reassured the whole loss sustained in respect of the subject insured, to the extent for which he is rein surer. Eagle Ins. Co. v. Lafayette Ins. Co., 9 Ind. 443; Hone v. Mutual Safety Whether the reinsurance is for the whole or part of the risk of the original insurer, it binds the reinsurers to make good to the insurer the loss up to the amount of the reinsurance (Chalaron v. Insurance Co. of North America, 21 South. 267, 48 La. Ann. 1582, 36 L. R. A. 742). Though a reinsurer is only liable for the amount for which the insurer is legally liable (Delaware Ins. Co. v. Quaker City Ins. Co., 3 Grant, Cas. [Pa.] 71), whether the reinsurer is liable to the full extent of the reinsurance or merely for the amount actually paid by the original insurer is a question on which the courts are not agreed. It has been held in Illinois (Illinois Mut. Fire Ins. Co. v. Andes Ins. Co., 67 Ill. 362, 16 Am. Rep. 620), and in Ohio. (Commercial Mut. Ins. Co. v. Detroit Fire & Marine Ins. Co., 38 Ohio St. 11, 43 Am. Rep. 413), that if the original insurer discharges its liability by the payment of a less amount than the original insurance, this amount is the measure of indemnity to be recovered from the reinsuring company, provided such amount is within the amount of the reinsurance policy, and does not exceed the actual loss. On the other hand, it has been held in Missouri that the true measure of damages is not what the original insurer has paid, but what he is bound under his policy to pay by reason of the loss (Gantt v. American Cent. Ins. Co., 68 Mo. 503). So in In re Republic Ins. Co., 20 Fed. Cas. 548, it was said that under the clause, "loss, if any, payable at the same time and pro rata with the insured," the reinsurer is liable to pay the amount the first insurer is liable for, and not the amount it actually pays. Specific application of these principles has been made where the original insurer has become insolvent. Thus, in Illinois Mut. Fire Ins. Co. v. Andes Ins. Co., 67 Ill. 362, 16 Am. Rep. 620, to which reference has already been made, where the policy of reinsurance stipulated, "Loss, if any, payable pro rata, at the same time and in the same manner as the reinsured company," it was held that, in case of loss, if the reinsured should pay only 10 cents on the dollar of its insurance, the reinsurer would pay at the same rate on the amount of its policy. It was, however, said (Cashau v. Northwestern Nat. Ins. Co., 5 Fed. Cas. 270) that the condition that in case of loss the reinsurer shall pay pro rata at and in the time and manner as the reinsured, means merely that the reinsurer shall have all the advantages of the time and manner of payment specified in the policy of the reinsured. It has no reference to the insolvency of the reinsured. That is to say, the liability of a reinsurer to pay the whole amount of a loss, to the extent of the reinsurance, to the reinsured, is not affected by the insolvency of the latter or his inability to fulfill his own contract with the original policy holder. Consolidated Real Estate & Fire Ins. Co. of Baltimore v. Cashow, 41 Md. 59; Mutual Safety Ins. Co. v. Hone, 2 N. Y. 235, affirming 3 N. Y. Super. Ct. 137; Blackstone v. Alemannia Ins. Co., 56 N. Y. 104; Eagle Ins. Co. v. Lafayette Ins. Co., 9 Ind. 443; Strong v. American Cent. Life Ins. Co., 4 Mo. App. 7. In Hunt v. New Hampshire Fire Underwriters' Ass'n, 68 N. H. 305, 38 Atl. 145, 38 L. R. A. 514, 73 Am. St. Rep. 602, the original insurer was reinsured as to one-third of the risk by a second insurer, which was as to one-half the risk by it assumed reinsured by a third insurer, which agreed to settle a loss "pro rata with the reinsured, and at the same time and place, and upon the same terms and conditions." A loss occurred, which the first insurer paid. The second insurer paid no part of the loss, and went into liquidation, and it was uncertain whether its assets were sufficient to satisfy its liabilities. It was held that the third insurer was liable for one-sixth of the loss, irrespective of the amount the second insurer might ultimately pay. Under the "pro rata" clause, the liability of the reinsurer is proportionate to the amount actually at risk, and where the policy of reinsurance was for half the amount of the original insurance, and the amount of the original insurance was reduced to less than the amount of the reinsurance policy, the reinsurer was not liable, on a loss occurring, for the full amount of the reduced insurance, but for one-half thereof (Home Ins. Co. v. Continental Ins. Co., 70 N. Y. Supp. 824, 62 App. Div. 63, affirmed in 180 N. Y. 389, 73 N. E. 65). That is to say, where the amount of original insurance is $10,000 and the reinsurance is $5,000 the insurer is liable for one-half of the loss, but if the original insurance is subsequently reduced to $2,000 the insurer does not thereby become liable for the whole amount of any loss. But where a policy of reinsurance binds the reinsurer to make good to the reinsured all loss or damage not exceeding a specified sum, such loss or damage to be estimated. according to the actual cash value of the property at the time of loss, the contract imports on its face that the reinsured is to make a full indemnity, and evidence of a local custom among insurers to pay only such a proportion of the loss as the amount of reinsurance bears to the original policy cannot be received to reduce the amount of recovery on the contract; there being no ambiguity therein (Mutual Safety Ins. Co. v. Hone, 2 N. Y. 235). Where the application clerk employed in the home office of the reinsuring company had full authority to accept risks and to cancel policies, he had prima facie authority to sign an agreement waiving a provision in a contract of reinsurance providing that the reinsurer should not be liable on such risks to exceed in any case the amount of the risk retained by the original insurer, and where at the time the reinsurer was asked to sign a waiver of such provision, the agent |