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Dealing with Insurers in Liquidation
Part One of a Two-Part Series
Insurer insolvency has become an increasingly significant concern. Since 1969, more than 400 property and casualty insurers have been placed in liquidation. The past 5 years have seen several larger commercial insurers go into liquidation, among them The Home Insurance Company and Reliance Insurance Company. Indeed, from just 2001 to 2003, Guaranty Associations paid approximately $5 billion in covered claims ' more than half the $10 billion they had paid in the previous 31 years from their inception. This article addresses what creditors need to know when dealing with a financially troubled insurer.
State Insolvency Statutes
Each state has an insurance department, which regulates the business of insurance within its state. The department, among other things, monitors the financial condition of insurers domiciled, and doing business, in the state.
Each state also has a statutory scheme for dealing with financially troubled insurers. See 26 Appleman on Insurance 2d (hereinafter 'Appleman on Ins.'), '159 (2005); Insurance Law 1999: Understanding the ABC's, Regulation of Insurance 602 PLI/Lit 119 (1999). Most states statutes are based, at least in part, on the model acts promulgated by the National Association of Insurance Commissioners ('NAIC'). The most current version of the NAIC's Model Rehabilitation and Liquidation Act ('Model Act') is available at www.naic.org. The insolvency statutes for the 50 states and the District of Columbia are as follows: Ala. Code '27-32-1 et seq. (2005); Alaska Stat. '21.78.010 et seq. (2004); Ariz. Rev. Stat. '20-611 et seq. (2004); Ark. Code Ann. '23-68-101 et seq. (2004); Cal. Ins. Code '1064.1 et seq. (2005); Colo. Rev. Stat. '10-3-501 et seq. (2004); Conn. Gen. Stat. '38a-903 et seq. (2004); Del. Code Ann. tit. 18, '5901 et seq. (2005); D.C. Code Ann. '31-1301 et seq. (2001); Fla. Stat. Ch. 631.001 et seq. (2005); Ga. Code Ann. '33-37-1 et seq. (2004); Haw. Rev. Stat. '431:15-101 et seq. (2004); Idaho Code '41-3301 et seq. (2004); 215 Ill. Comp. Stat. 5/187 et seq. (2004); Ind. Code '27-9-1-1 et seq. (2001); Iowa Code '507C.1 et seq. (2004); Kan. Stat. Ann. '40-3605 et seq. (2003); Ky. Rev. Stat. Ann. '304.33-010 et seq. (2004); La. Rev. Stat. Ann. '22:732 et seq. (2004); Me. Rev. Stat. Ann. tit. 24-A, '4351 et seq. (2004); Md. Code Ann., Ins. '9-201 et seq. (2003); Mass. Gen. Laws Ch. 175, '180A et seq. (2005); Mich. Comp. Laws '500.8101 et seq. (2004); Minn. Stat. '60B.01 et seq. (2004); Miss. Code Ann. '83-24-1 et seq. (2004); Mo. Rev. Stat. '375.950 et seq. (2004); Mont. Code Ann. '33-2-1301 et seq. (2004); Neb. Rev. Stat. '44-4801 et seq. (2004); Nev. Rev. Stat. 696B.010 et seq. (2001); N.H. Rev. Stat. Ann. '402-C:1 et seq. (2004); N.J. Stat. Ann. '17B:30C-1 et seq. (2004); N.M. Stat. Ann. '59A-41-1 et seq. (2005); N.Y. Ins. Law '7401 et seq. (2004); N.C. Gen. Stat. '58-30-1 et seq. (2004); N.D. Cent. Code '26.1-06.1-01 et seq. (2005); Ohio Rev. Code Ann. '3903.01 et seq. (2005); Okla. Stat. tit. 36, '1801 et seq. (2004); Or. Rev. Stat. '734.014 et seq. (2003); 40 Pa. Stat. 221.1 et seq. (2004); R.I. Gen. Laws '27-14.3-1 et seq. (2004); S.C. Code Ann. '38-27-10 et seq. (2004); S.D. Codified Laws '58-29B-1 et seq. (2003); Tenn. Code Ann. '56-9-101 et seq. (2004); Tex. Ins. Code Ann. '21.28 et seq. (2004); Utah Code Ann. '31A-27-101 et seq. (2004); Vt. Stat. Ann. tit. 8 '7031 et seq. (2004); Va. Code Ann. '38.2-1500 et seq. (2004); Wash. Rev. Code '48.31.030 et seq. (2004); W. Va. Code '33-10-1 et seq. (2004); Wis. Stat. '645.01 et seq. (2004); Wyo. Stat. Ann. '26-28-101 et seq. (2004).
Insolvency is defined by state statute. An insurer is generally regarded as insolvent when its liabilities exceed its assets and/or it is unable to pay its obligations as they become due. See People ex rel. Shapo v. Agora Syndicate, Inc., 752 N.E.2d 1186 (Ill. App. Ct.), appeal denied, 763 N.E.2d 777 (Ill. 2001); Foster v. W. Branch Adm'rs, Inc., 597 A.2d 721 (Pa. Commw. Ct. 1991), aff'd, 631 A.2d 595 (Pa. 1993). See also Model Act, '3.
State regulators have a great deal of discretion in their dealings with financially troubled insurers. E.g., In re Conservation of Alpine Ins. Co., 741 N.E.2d 663 (Ill. App. Ct. 2000). Regulators are not required to wait until an insurer is actually insolvent before they can act. See Ky. Cent. Life Ins. Co. v. Stephens, 898 S.W.2d 83 (Ky. 1995); Pa. Assigned Claims Plan v. Insur. Comm'r, 420 A.2d 25 (Pa. Commw. Ct. 1980). They can step in whenever an insurer is in a 'hazardous financial condition.' E.g., Brown v. Magnolia Fire. & Cas. Ins. Co., 646 So. 2d 428 (La. Ct. App. 1994), writ denied, 649 So. 2d 409 (La. 1995); Eakin v. Am. Underwriters Group, Inc., 552 N.E.2d 50 (Ind. Ct. App. 1990), cert. denied, 500 U.S. 904 (1991). They can demand additional financial reporting or require insurers to implement measures designed to reduce debt. State regulators can take an active role in running the insurer's business. They can place an insurer in rehabilitation, and/or completely take over its operations. See generally 26 Appleman on Ins., ”159-162 (2005).
Liquidation: The Last Resort
Liquidation remains a state regulator's remedy of last resort. See In re Executive Life Ins. Co., 32 Cal. App. 4th 344, 346, 38 Cal. Rptr. 2d 453, 459 (Cal. Ct. App. 1995); Mueller v. Beamalloy, Inc., 994 S.W.2d 855, 859 (Tex. App. 1999). Accord Koken v. Legion Ins. Co., 831 A.2d 1196, 1230 (Pa. Commw. 2003). In a liquidation, all of the insurer's policies are deemed cancelled, unearned premiums are returned to policyholders, and the insurer's assets are collected and distributed to policyholders and other creditors. At the end of the liquidation process, the insurer ceases to exist. See 26 Appleman on Ins., '162-163 (2005).
An administrator in the state in which the insurer is domiciled usually handles the liquidation. E.g., Fla. Stat. Ch. '631.11 (2005); N.J. Stat. Ann. '17:30C-9 (2004); N.Y. Ins. Law '7405 (2004); OR. Rev. Stat. '734.180 (2003). The state courts supervise liquidation proceedings. Depending on the size of the insurer, the number of outstanding claims, and the condition of the insurer's finances, liquidation proceedings may take several years to complete. See 26 Appleman on Ins., '162 (2005); e.g., Koken v. Legion Ins. Co., 831 A.2d 1196 (Pa. Commw. Ct. 2003); In re Liquidation of Integrity Ins. Co., 754 A.2d 1177 (N.J. 2000).
Part Two of this article will discuss liquidator's broad powers; automatic stay of other proceedings; distribution plans; issues pertaining to claims; distribution and priorities; drop down; set-offs; and claims by third parties.
Sherilyn Pastor is a partner at McCarter & English, in Newark, NJ, where she is Practice Group Leader of the Insurance Coverage & General Litigation team. This article is not intended to provide legal advice. Issues relating to insurance coverage are fact specific, and their resolution will depend on the precise policy terms involved and the law governing the disputes, which varies from state to state. The views expressed are not necessarily those of McCarter & English or its clients.
Part One of a Two-Part Series
Insurer insolvency has become an increasingly significant concern. Since 1969, more than 400 property and casualty insurers have been placed in liquidation. The past 5 years have seen several larger commercial insurers go into liquidation, among them The Home Insurance Company and Reliance Insurance Company. Indeed, from just 2001 to 2003, Guaranty Associations paid approximately $5 billion in covered claims ' more than half the $10 billion they had paid in the previous 31 years from their inception. This article addresses what creditors need to know when dealing with a financially troubled insurer.
State Insolvency Statutes
Each state has an insurance department, which regulates the business of insurance within its state. The department, among other things, monitors the financial condition of insurers domiciled, and doing business, in the state.
Each state also has a statutory scheme for dealing with financially troubled insurers. See 26 Appleman on Insurance 2d (hereinafter 'Appleman on Ins.'), '159 (2005); Insurance Law 1999: Understanding the ABC's, Regulation of Insurance 602 PLI/Lit 119 (1999). Most states statutes are based, at least in part, on the model acts promulgated by the National Association of Insurance Commissioners ('NAIC'). The most current version of the NAIC's Model Rehabilitation and Liquidation Act ('Model Act') is available at www.naic.org. The insolvency statutes for the 50 states and the District of Columbia are as follows: Ala. Code '27-32-1 et seq. (2005); Alaska Stat. '21.78.010 et seq. (2004); Ariz. Rev. Stat. '20-611 et seq. (2004); Ark. Code Ann. '23-68-101 et seq. (2004); Cal. Ins. Code '1064.1 et seq. (2005); Colo. Rev. Stat. '10-3-501 et seq. (2004); Conn. Gen. Stat. '38a-903 et seq. (2004); Del. Code Ann. tit. 18, '5901 et seq. (2005); D.C. Code Ann. '31-1301 et seq. (2001);
Insolvency is defined by state statute. An insurer is generally regarded as insolvent when its liabilities exceed its assets and/or it is unable to pay its obligations as they become due. See
State regulators have a great deal of discretion in their dealings with financially troubled insurers. E.g., In re Conservation of Alpine Ins. Co., 741 N.E.2d 663 (Ill. App. Ct. 2000). Regulators are not required to wait until an insurer is actually insolvent before they can act. See
Liquidation: The Last Resort
Liquidation remains a state regulator's remedy of last resort. See In re Executive Life Ins. Co., 32 Cal. App. 4th 344, 346, 38 Cal. Rptr. 2d 453, 459 (Cal. Ct. App. 1995);
An administrator in the state in which the insurer is domiciled usually handles the liquidation. E.g., Fla. Stat. Ch. '631.11 (2005); N.J. Stat. Ann. '17:30C-9 (2004); N.Y. Ins. Law '7405 (2004); OR. Rev. Stat. '734.180 (2003). The state courts supervise liquidation proceedings. Depending on the size of the insurer, the number of outstanding claims, and the condition of the insurer's finances, liquidation proceedings may take several years to complete. See 26 Appleman on Ins., '162 (2005); e.g.,
Part Two of this article will discuss liquidator's broad powers; automatic stay of other proceedings; distribution plans; issues pertaining to claims; distribution and priorities; drop down; set-offs; and claims by third parties.
Sherilyn Pastor is a partner at
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