In the
United States Court of Appeals
For the Seventh Circuit

No. 99-1886

Reliance Insurance Company,

Plaintiff-Appellant,

v.

Shriver, Inc.,

Defendant-Appellee.



Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 98 C 5211--Rubin Castillo, Judge.


Argued January 19, 2000--Decided August 14, 2000




 Before Bauer, Cudahy and Evans, Circuit Judges.

 Cudahy, Circuit Judge. Reliance Insurance
Company sued Shriver, Inc., alleging that Shriver
owed it premiums on various insurance policies
issued in 1997. These policies were issued by
Reliance but were completely reinsured and
administered by a member of the Home State
Insurance Group, Quaker City./1 Shriver had
acted as Home State’s agent during the issuance
of the policies to two trucking companies in
Illinois and was to collect the premiums from the
insureds. The district court denied a motion for
summary judgment filed by Reliance. Shriver then
filed its own motion for summary judgment,
arguing that it had rightfully set off the
premiums on the Reliance policies against premium
refunds (from canceled policies) owed to it by
Home State. The district court granted Shriver’s
motion. Reliance now appeals.

 This case arises in connection with insurance
policies issued to Robinson Bus Service, Inc.,
and to White Transportation through Shriver. In
September of 1996, Shriver, acting pursuant to
its agency agreement with the Home State
Insurance Group and as insurance broker to
Robinson and White, collected the full premiums
for these one-year policies. These premiums were
then forwarded by Shriver to Home State pursuant
to their agency agreement. Both Robinson and
White conducted their businesses in Illinois, but
Home State was not licensed to issue insurance
policies directly in Illinois. Home State,
therefore, had to use what is known as a
"fronting arrangement" to insure these Illinois
risks. In a fronting arrangement--a well-
established and perfectly legal scheme--policies
are issued by a state-licensed insurance company
and then immediately reinsured to 100 percent of
their face value by the out-of-state, unlicensed
insurer./2 In a typical fronting arrangement,
the fronting insurer issues policies on its own
paper and in its own name, and the out-of-state
unlicensed insurer takes over the administration
of all claims as part of the reinsurance
agreement. The original policies issued to
Robinson and White in September of 1996 (the 1996
policies) were fronted by Security Insurance
Company of Hartford (Hartford), an Illinois-
licensed insurance company, and reinsured by Home
State. As was typical of this kind of
arrangement, Hartford, as a fronting fee, earned
a small percentage of the premiums in exchange
for issuing the policy documents, while the bulk
of the premiums ended up with Home State for
underwriting 100 percent of the risk.

 Robinson’s and White’s 1996 policies were one-
year policies and were intended to remain in
effect through September of 1997. Between
September of 1996 and the Spring of 1997,
however, Home State had very favorable claims
experience with respect to the 1996 policies.
Robinson and White were good customers, and
because Home State feared a competitor would
offer the trucking companies a lower rate at the
end of the policy period, Home State took steps
to retain their business. First, Home State
canceled the 1996 policies mid-term. Second, Home
State issued both Robinson and White replacement
policies (the 1997 replacement policies) at lower
rates./3 These new policies also had to be
fronted, and the 1997 replacement policies were
issued by Reliance, under a typical fronting
arrangement with Home State. There was no
relationship between Reliance and Hartford (which
had fronted the 1996 policies), and as before,
Shriver served Robinson and White by acting as an
agent and broker for Home State.

 Robinson and White were issued the 1997
replacement policies with one-year coverage on
Reliance’s own paper, and Home State reinsured
100 percent of the risk on these policies. Home
State and Reliance established this fronting
arrangement for the 1997 replacement policies in
a contract known as a "facultative reinsurance
agreement" between Reliance and Quaker City.
Under the reinsurance agreement, Reliance
designated Quaker City as its agent for
collecting premiums and ceded administration of
the 1997 replacement policies to Quaker City. The
Quaker City-Reliance agreement did not address
Home State’s relationship with Shriver--nor did
it establish a relationship between Reliance and
Shriver. Under the Home State-Shriver agency
agreement, Shriver was to collect premiums from
Robinson and White for the 1997 replacement
policies and pay them to Home State. Then, under
its agreement with Reliance, Home State was to
deposit the premiums in a bank account over which
Reliance had sole control. Once the money was
deposited, Reliance would keep its small fronting
commission for writing the policies and would
transfer the bulk of the collected money--as Home
State’s reinsurance premium--to a premium trust
account. Home State could access this account
only for specific purposes related to the
administration of the policies./4

 The new 1997 replacement policies were issued,
but there remained some administrative clean-up
with respect to the canceled 1996 policies.
Robinson and White had paid premiums to Shriver
for the full term on the 1996 policies, but
because those policies had been canceled early,
the trucking companies had functionally overpaid
Shriver for four months worth of premiums--
totaling approximately $259,000./5 (The amount
of this overpayment is known in the insurance
industry as "unearned premiums." They are called
"unearned" because they are premium payments for
days of coverage in the future, and if the policy
is canceled, the unearned premiums are returned
to the insureds.) Shriver had already paid the
full premiums from the 1996 policies over to Home
State. So Shriver had also overpaid Home State,
again by $259,000. Shriver received the invoice
from Home State for the premiums on the 1997
replacement policies, and on July 21, 1997,
Shriver set off the amount that it had overpaid
on the canceled 1996 policies against the amount
it owed to Home State on the 1997 replacement
policies. Shriver also credited this amount to
Robinson and White, and on August 11, 1997,
Shriver received the current balance due for the
1997 replacement policies from Robinson and
White. These payments reflected the $259,000
credit from Shriver.

 But, by June of 1997, it started to become
clear that Home State was in serious financial
trouble. Quaker City was being monitored by the
Pennsylvania Department of Insurance, and other
companies of the Home State Insurance Group were
being monitored by the insurance regulators in
other states. Concerned that Home State/6 might
not be able to fulfill its reinsurance
obligations on the 1997 replacement policies
(thus leaving Reliance liable with nowhere to
collect reinsurance money), Reliance met with the
Pennsylvania Department of Insurance on August 8,
1997, seeking permission to replace Quaker City
(and thereby remove Home State) as the
administrator of the Reliance-fronted policies.
The Department agreed, and on August 12, 1997,
Reliance informed Shriver that it was taking over
policy administration and that all "current and
future premium payments" should be sent directly
to Reliance. Prior to this communication, Shriver
had never dealt directly with Reliance, but after
receiving the letter, Shriver remitted all
subsequent premiums it collected from Robinson
and White directly to Reliance--including the
payment it had received from the insureds on
August 11. However, because it believed that it
had already set off the unearned premiums on the
1996 policies (which it had earlier overpaid)
against what it owed Home State on the 1997
replacement policies, Shriver’s payments to
Reliance were decreased to reflect the $259,000
set-off. Reliance was not pleased.

 Throughout the term of the 1997 replacement
policies, Reliance maintained coverage but argued
with Shriver over the $259,000. Reliance
maintained that Shriver owed that money to
Reliance, but Shriver did not agree. Shriver
continued to remit all additional premiums it
collected after August 12, 1997, to Reliance
precisely as Reliance wanted. In an attempt to
force Shriver to pay the disputed money, Reliance
sent Shriver a "Broker Agreement" on December 18,
1997. This agreement purported to create a
retroactive agency relationship between Reliance
and Shriver, thereby obligating Shriver to pay
the set-off amount to Reliance. Shriver did not
execute the proposed agreement.

 Following the end of the 1997 replacement
policy period, Reliance brought this lawsuit
against Shriver in an attempt to recover the
money Shriver claims to have set off against Home
State. On March 11, 1999, the district court
granted summary judgment in favor of Shriver on
the ground that Shriver was entitled to the set-
off under Illinois law. Reliance appeals.

 We review the district court’s decision to
grant summary judgment in favor of Shriver de
novo. See Hostetler v. Quality Dining, Inc., No.
98-2386, 2000 WL 862482, at *5 (7th Cir. June 29,
2000). Summary judgment is appropriate if,
construing the record in the light most favorable
to Reliance, "there is no genuine issue as to any
material fact" and Shriver "is entitled to a
judgment as a matter of law." Fed. R. Civ. P. 56(c).
See also Hostetler, 2000 WL 862482, at *5.
Reliance makes two arguments on appeal. First, it
claims that, under Illinois insurance law,
Shriver had a statutory duty to remit to Reliance
all premiums collected on policies issued by
Reliance. Second, Reliance argues that Shriver
was not entitled to set off the 1996 policy
overpayments against the 1997 replacement policy
premiums. We address each in turn.

I.   Duty to Remit Premiums

 Reliance begins its argument with the
proposition that, as an insurer, it is entitled
to the payment of premiums in consideration for
providing insurance coverage under the policies
it issues. This is a sound proposition as a
general matter, and it is undisputed that Shriver
dutifully paid collected premiums to Reliance
after August 12, 1997, when Reliance notified
Shriver that it was taking over administration of
the 1997 replacement policies. Although Shriver’s
duty to pay premiums after August 12, 1997, (and
its compliance with that duty) is undisputed, the
parties hotly dispute whether Shriver owed a
similar duty to Reliance before that date.
Shriver claims that it had no duty to pay
anything to Reliance prior to August 12, 1997.
Its duty before this date, argues Shriver, was to
Home State and Home State only. Therefore,
Shriver concludes that it validly set off the
$259,000 against its debt to Home State prior to
August 12, 1997. Reliance, however, counters by
arguing that Shriver was not entitled to set off
because Shriver was compelled by statute to pay
all collected premiums--even those collected
before August 12, 1997--directly to Reliance.

 Reliance finds the source of this alleged duty
in the Illinois Insurance Code at 215 Ill. Comp.
Stat. 5/508.1, which states in pertinent part:

Any money which an insurance producer . . .
receives for . . . policies of insurance shall be
held in a fiduciary capacity, and shall not be
misappropriated, converted or improperly
withheld. Any insurance company which delivers to
any insurance producer in this State a policy or
contract for insurance pursuant to the
application or request of an insurance producer,
authorizes such producer to collect or receive on
its behalf payment of any premium which is due on
such policy or contract for insurance . . . .

215 Ill. Comp. Stat. 5/508.1. Reliance argues, at
least in one part of its brief, that Shriver’s
set-off of the $259,000 of unearned premiums from
the 1996 policies against the 1997 replacement
policy premiums constituted misappropriation,
conversion or improper withholding under sec.
5/508.1. But Reliance’s argument overlooks the
contractual arrangement that governed the
issuance of policies and the collection of
premiums. Recall that under the agreements in
effect prior to August 12, 1997, premiums flowed
from the insureds to Shriver, then to Home State,
then to Reliance (and then back to Home State,
minus Reliance’s fronting commission). Reliance
is trying to use sec. 5/508.1 to overlook this
arrangement and create a duty flowing directly
from Shriver to Reliance. But case law
interpreting sec. 5/508.1 indicates that an
insurer and agent can vary the premium-collection
procedure by contract. See Scott v. Assurance Co.
of America, 625 N.E.2d 439, 442 (Ill. App. Ct.
1993) (explaining that sec. 5/508.1 was not meant
to "prohibit[ ] an insurer from determining the
billing procedure to be used" because "the effect
would be drastic and no indication of such an
interpretation has been called to our
attention")./7 The premium-collection procedures
here were arranged by contract, Reliance entered
into that contractual scheme, and it presents no
reason why it should not be held to its
agreement. The contracts here provided that Home
State, not Shriver, was Reliance’s agent for the
collection of insurance premiums. Under the
contracts, Shriver was to pay Home State and Home
State was, in turn, to pay Reliance. Had Reliance
wanted a direct relationship with Shriver, it
could have created one./8 But, although Reliance
may not be happy about it now, there was no
direct relationship between Reliance and Shriver
prior to the letter of August 12, 1997--nor does
sec. 5/508.1 create such a duty independent of
the contractual arrangements among the parties
here. Cf. Scott, 625 N.E.2d at 442.

 Later in its brief, however, Reliance apparently
acknowledges that the contractual obligations
defined the duties among Reliance, Home State and
Shriver prior to August 12, 1997:

[Home State]’s only entitlement to those premiums
stems from Reliance’s appointment of [Home State]
as its agent for collecting them. Thus, as long
as [Home State] was authorized to act as
Reliance’s agent for collection of premiums,
Shriver’s duty to remit the premiums from the
Robinson and White policies would have been
satisfied by remitting those premiums to [Home
State]; and Reliance would not be entitled to now
recover any premiums on the Robinson and White
policies that Shriver had paid to [Home State]
prior to August 12, 1997 (when Reliance revoked
[Home State]’s authority to collect those
premiums on its behalf).

Appellant’s Br. at 11 (emphasis added). Home
State was Reliance’s agent for collection of
premiums until August 12, when Reliance revoked
Home State’s authority. If Shriver’s set-off was
valid (a point we shall address momentarily), it
took place during the period when Reliance
concedes that Shriver had authority to pay
premiums to Home State. Reliance tries to avoid
the overwhelming import of this concession by
arguing that "[h]owever, Shriver did not pay any
of the premium for the Robinson and White
policies to [Home State] either before, or for
that matter, after, August 12, 1997." Id. By so
arguing, Reliance is saying that setting off the
debt Home State owed to it against the debt it
owed to Home State, Shriver did not "pay" its
debt to Home State--ever. But to argue that set-
off is not a form of "payment" is clearly
incorrect. Set-off is a means of (or substitute
for) payment of mutual debts owed, see 215 Ill.
Comp. Stat. 5/206 ("such credits and debts shall be
set off or counterclaimed and the balance only
shall be allowed or paid"), so by setting off its
debt to Home State (if the set-off was proper),
Shriver clearly "paid" that portion of its debt
to Home State.

 In sum, Reliance does not establish that
Shriver had any sort of fiduciary obligation
directly to Reliance prior to August 12, 1997.
Home State certainly owed a duty to Reliance, but
Shriver’s obligation during that period was to
Home State. Shriver’s obligation to Reliance
arose only after Reliance’s letter of August 12--
after the set-off occurred. Reliance cannot use
sec. 5/508.1 to overlook the contractually
defined relationships and effectively bypass Home
State and make Shriver its agent. Neither sec.
5/508.1, nor any other law of which we are aware,
enforces a transitive property of agency, i.e. no
law makes Shriver Reliance’s agent just because
Shriver was Home State’s agent and Home State was
Reliance’s agent. Accordingly, Shriver’s argument
here fails.

II.   Set-Off

 Reliance also argues that the set-off itself
was not appropriate because Shriver and Home
State did not share the proper kind of
relationship. The parties seem to agree that the
specific set-off at issue here--that between
Shriver and Home State--is governed by the
Illinois Insurance Code,/9 the relevant section
of which opens by stating:

In all cases of mutual debts or mutual credits
between [an insolvent insurer] and another
person, such credits and debts shall be set off
or counterclaimed and the balance only shall be
allowed or paid . . . .

215 Ill. Comp. Stat. 5/206. Although set-off in
favor of an insurance broker against an insurance
company is generally permitted by the first
sentence of the statute, sec. 5/206 places a
further, specific restriction on set-offs like
the one at issue in this case:

No set-off shall be allowed in favor of an
insurance agent or broker against his account
with the company, for the unearned portion of the
premium on any canceled policy, unless that
policy was canceled prior to the entry of the
Order of Liquidation or Rehabilitation, and
unless the unearned portion of the premium on
that canceled policy was refunded or credited to
the assured or his representative prior to the
entry of the Order of Liquidation or
Rehabilitation.

Id. Reading these two quoted passages together--
based on the general permissibility of set-off in
the first sentence and the negative implication
of the restrictive language in the subsequent
statement--it becomes evident that under Illinois
insurance law, set-off of unearned premiums on
canceled policies, i.e. overpayments, are allowed
against an insurance company in favor of its
agent when three requirements are met:

(1) there are "mutual debts,"

(2) the "policy was canceled prior to" the
insurance company’s liquidation, and

(3) the "unearned portion of the premium on that
canceled policy was refunded or credited to the
assured . . . prior to" liquidation.

See 215 Ill. Comp. Stat. 5/206. If these conditions
are met, set-off is permissible.

 The second and third requirements are easily
met. The companies comprising Home State
Insurance Group were liquidated in October of
1997. (Quaker City was liquidated by the state of
Pennsylvania on October 1, 1997.) But the 1996
Robinson and White policies were canceled
effective on or before May 1, 1997. Further, the
refund to Robinson and White was credited at the
time they paid the balance due on the 1997
replacement policies (August 11, 1997). Thus, the
1996 policies were "canceled prior to" and the
"unearned portion of the premium[s] [were]
refunded or credited prior to" Home State’s
liquidation, as required by sec. 5/206.
Reliance’s argument that set-off was improper
thus hinges on requirement (1)--whether the debts
between Home State and Shriver were "mutual"
within the meaning of the statute.

 Section 5/206 was modeled on the federal
Bankruptcy Act of 1898 and has been in effect
since 1937, so analogies to bankruptcy have
appropriately influenced the interpretation of
this section. In Stamp v. Insurance Company of
North America, this court used just such an
analogy to explain that, for the purposes of sec.
5/206, "mutual" means "contemporaneous and in the
same capacity." 908 F.2d 1375, 1379 (7th Cir.
1990). The critical aspect of the meaning of
"mutual" is thus temporal because "a pre-
bankruptcy debt may not be offset against a debt
arising after the filing." Id. at 1380. Here,
both debts arose well prior to Home State’s
liquidation. The pre-liquidation/post-liquidation
distinction--based on the analogy to pre-
filing/post-filing debts in bankruptcy, see id.--
is the key element of mutuality under sec. 5/206.
This distinction is further reflected in the
requirement that the policy must be canceled
prior to liquidation (thus resembling a pre-
filing debt in bankruptcy). Further, even if we
were to enforce a stricter standard of
contemporaneity, the debts here would pass. Both
debts--the $259,000 refund owed to Shriver by
Home State and the premiums on the 1997
replacement policies owed by Shriver to Home
State-- arose out of the same transaction: the
cancellation of the 1996 policies and the
immediate issuance of the 1997 replacement
policies. Thus, the debts basically arose
simultaneously.

 But Reliance argues that the debts did not
arise in the same capacity, and that, therefore,
mutuality cannot exist. Reliance cites Lincoln
Towers Insurance Agency v. Boozell for the
proposition that "[w]here the liability of the
party claiming the right to setoff arises from a
fiduciary duty . . . the requisite mutuality of
debts or credits does not exist." 684 N.E.2d 900,
905 (Ill. App. Ct. 1997). But this argument
stumbles because Lincoln Towers is far from
analogous to the present case. Lincoln Towers
disallowed agents’ set-off of premiums received
and deposited into a trust account against earned
commissions owed to the agents by the insurance
company. Although the opinion is not entirely
clear on this point, it seems that the plaintiffs
in Lincoln Towers were trying to set off
commissions earned after the liquidation order
against premiums it had collected and deposited
prior to the liquidation order. See 684 N.E.2d at
902 ("Approximately five months after the entry
of the agreed order of liquidation, the producers
filed the instant declaratory judgment action,
seeking a declaration of their right to set off
earned commissions against previously collected
premiums due [to the insurance company]."). Thus,
the Lincoln Towers decision turns on the temporal
factors we have already discussed. See 684 N.E.2d
at 904 (noting that the liquidator challenged the
set-off because "the language of [sec. 5/206]
precludes a set off of the earned premiums which
had not been credited prior to the date of the
liquidation because, after the declaration of
insolvency, there is no mutuality between the
parties"). Set-off was properly disallowed in
Lincoln Towers because an agent cannot set off a
pre-liquidation debt it owed the insurer against
a post-liquidation debt the insurer owed to it.

 Lincoln Towers does contain general language
suggesting that set-off may not have been
appropriate here because one party had a
fiduciary relationship to the other, but we are
more persuaded by the specific language of sec.
5/206 that apparently permits Shriver’s set-off.
Section 5/206 specifically addresses the
situation presented here-- the set-off of
unearned premiums on policies canceled prior to
liquidation of the insurer. If we were to
conclude that Lincoln Towers controls this case,
as Reliance urges us, we would be interpreting
the Illinois Insurance Code in a fashion that
renders its relevant provision ineffective.
Lincoln Towers, as read by Reliance, mandates
that any time an agent collects a premium, it
does so in a fiduciary capacity that
automatically eliminates "mutuality." But if
Reliance is correct, then the relevant clause of
sec. 5/206 that implies an agent’s entitlement to
set-off would be useless. Section 5/206 clearly
contemplates an agent’s ability to set off
unearned premiums on a canceled policy against
the insurance company, so it necessarily implies
that a mere pre-liquidation agency (or fiduciary)
relationship between an insurance agent and an
insurance company does not disable the agent from
setting off reciprocal pre-liquidation debts. We
should not adopt an interpretation of a statute
that renders a statutory section useless, see,
e.g., Chicago Truck Drivers, Helpers and
Warehouse Union (Independent) Pension Fund v.
Century Motor Freight, Inc., 125 F.3d 526, 533
(7th Cir. 1997); Welsh v. Boy Scouts of America,
993 F.2d 1267, 1272 (7th Cir. 1993), and decline
Reliance’s invitation to find a lack of mutuality
between Home State and Shriver. Therefore, we
find that all the prerequisites for set-off under
sec. 5/206 are met, and the set-off against Home
State was proper.

 Besides its defeat by the relevant statutory
provisions, Reliance’s claim to the $259,000 that
was set off has no basis in equity. Robinson and
White had already paid for coverage running
through September of 1997, and Shriver had
already paid that sum over to Home State. If we
were to allow Reliance’s $259,000 claim against
Shriver, we would be forcing double payment for
insurance coverage during the summer of 1997--the
period when the 1997 replacement policies were
substituted for the canceled 1996 policies.
Reliance may have had a claim against Home State
for its fronting fee during this overlap, but
neither Reliance nor anyone else furnished
coverage that justifies forcing a redundant
premium payment either from the insureds or from
Shriver.

 For the foregoing reasons, we reject Reliance’s
arguments and Affirm the judgment of the district
court.



/1 The Home State Insurance Group was comprised of
Home State Insurance Company, Quaker City
Insurance, Pinnacle Insurance Company and
Westbrook Insurance Company. Shriver’s agency
agreement was with each of these entities, and we
shall refer to them collectively as "Home State."

/2 This contractual relationship makes sure that all
losses on the policies will be paid by the
reinsurer.

/3 Robinson’s new policies went into effect on May
1, 1997. White’s new policies went into effect on
March 12 and 17, 1997.

/4 Under the agreement, Home State (acting through
Quaker City) had the specific authority to
withdraw funds from the premium trust account in
order to (1) make payments to Reliance, (2) make
payment of return premiums and commissions on
canceled Reliance policies, (3) pay agents’
commissions, (4) reimburse itself for reinsurance
losses, (5) transfer to another account for
claims services and (6) to make other withdrawals
"related to" paid Reliance policies with the
written consent of Reliance. See J.A. at 127.

/5 In its complaint, Reliance stated that the
premiums owed to it by Shriver amounted to
$259,169.15.

/6 The reinsurance agreement was between Reliance
and Quaker City, and Quaker City’s obligation to
reinsure had been guaranteed by the Home State
Insurance Group.

/7 Illinois courts have noted that the purpose of
sec. 5/508.1 is "to protect a consumer who pays
the agent from any further liability for the
premium if the independent producer fails to
remit to the insurer." Scott v. Assurance Co. of
America, 625 N.E.2d 439, 442 (Ill. App. Ct.
1993). See also Zak v. Fidelity-Phenix Ins. Co.,
208 N.E.2d 29, 35 (Ill. App. Ct. 1965).

/8 In fact, it tried to do so by asking Shriver to
enter into the retroactive agency agreement
mentioned earlier.

/9 Quaker City was liquidated under the laws of
Pennsylvania, and other members of the Home State
Insurance Group were liquidated under the laws of
other states, e.g. New Jersey. The contracts and
actions central to this action, however, took
place in Illinois, and as this court has noted,
any statute in existence at the time the parties
enter into a contract can be deemed to be part of
that contract (in the absence of contrary terms).
See Selcke v. New England Ins. Co., 995 F.2d 688,
689 (7th Cir. 1993). See also Lincoln Towers Ins.
Agency v. Boozell, 684 N.E.2d 900, 903-04 (Ill.
App. Ct. 1997). Therefore, we believe that we may
follow the parties’ lead and apply Illinois
insurance law to this issue.
