3/27/2015 I NSURER & S URETY I NSOLVENCY & I TS EFFECT ON C - PDF document

3/27/2015 I NSURER & S URETY I NSOLVENCY & I TS EFFECT ON C LAIMS A DAM P. H ANDFINGER G UY W. H ARRISON T Y G. T HOMPSON Insurer & Surety Insolvency Insurer & Surety Insolvency 1

3/27/2015 Insurer & Surety Insolvency Insurer & Surety Insolvency Insurer & Surety Insolvency 2

3/27/2015 I NSURER & S URETY I NSOLVENCY & I TS EFFECT ON C LAIMS F LORIDA ’ S I NSURERS R EHABILITATION AND L IQUIDATION A CT IRLA’s Purpose � Insolvency occurs when the assets are insufficient to discharge all of its liabilities. � Created to protect policy holders and claimants. � Promotes efficient administration of surety and insurer receiverships by facilitating interstate cooperation. � A “receivership” is the placement of a surety or insurer under the control of a “receiver.” � Florida Department of Financial Services’ Division of Rehabilitation and Liquidation. Receivership Roles of the State and the Court � Under Chapter 631, Florida Statutes, a “delinquency proceeding” constitutes “the sole and exclusive method of liquidating, rehabilitating, reorganizing, or conserving an insurer.” � The proceedings are conducted in the Circuit Court of Leon County. � There the Director of the Office of Insurance Regulation provides the Department with evidence that the surety or insurer is insolvent. 3

3/27/2015 Receivership Roles of the State and the Court � At the court’s direction, the Department takes possession of the surety’s or insurer’s assets and administers them in accordance with an approved claims report. � The Department assumes the rights and obligations of the insolvent surety or insurer and directs the resolution of claims as approved by the Court. I NSURER & S URETY I NSOLVENCY & I TS EFFECT ON C LAIMS C LAIMS A GAINST S URETIES Procedure for Resolving Claims � The IRLA’s claims procedure constitutes the “ exclusive means for obtaining payment of claims from the insolvent surety or receivership estate.” � The Department is to “notify all persons who may have claims against the insurer that they must file such claims with it at a place and within the time specified in the notice, or else such claims will be forever barred .” � The Department is to evaluate the claim and file a comprehensive claims report and specify its recommendations. 4

3/27/2015 Procedure for Resolving Claims � Upon court approval, the Department gives notice to the claimant of the amount recommended and the deadline to file any objections. Cooperation and Comity � Florida extends reciprocity in the treatment of policyholders in receivership to “reciprocal states.” � National Association of Insurance Commissioners Rehabilitation and Liquidation Model Act; or � Uniform Insurers Liquidation Act. � See i.e. Frontier Insurance Co. v. Am. Title Services � See i.e. Am. Bonding Co. v. Coastal Metal Sales, Inc. Automatic Stay of Claims � The IRLA prohibits any actions against Florida- domiciled sureties or insurers in receivership. � The automatic stay is permanent and survives the entry of an order of conservation, rehabilitation, or liquidation. � Also bars commencement or continuation of any judicial, administrative, or other action against a surety or an insurer; and � the enforcement of a judgment against the surety or an insurer. 5

3/27/2015 Automatic Stay of Claims � Exception to the rule is limited to the enforcement of a judgment against a surety or an insurer by the judgment creditor. � It must prove: � (1) that the judgment is not voidable or void by the Department; and � (2) that the property from which the judgment would be satisfied does not constitute premium funds or another asset which belongs to the surety or insurer. � See i.e. In re Receivership of Guarantee Sec. Life Ins. Co . Filing Claims with Receiver � The IRLA contemplates that “all claims against an entity in receivership be filed with the receiver and determined by the receivership court.” � The Department is entitled to take possession of the surety’s or insurer’s assets and distribute them in accordance with a court approved claims report. � It must also distribute such assets in accordance with the general priority of claims statute. � See i.e. Consumers Super Mkt. No. 2, Inc. v. Underwriters at Lloyds Filing Claims with Receiver � Where claims may be filed depends on where the surety or insurer is domiciled and whether an ancillary receivership exists. � The “domiciliary state” is the state where a surety or insurer is incorporated or organized. � The “ancillary state,” means any state other than a domiciliary state. � In proceedings against a surety or an insurer domiciled in a reciprocal state , Florida resident claimants may file claims with the domiciliary receiver, or with any ancillary receiver established by Florida. 6

3/27/2015 Filing Claims with Receiver � In proceedings against a surety or an insurer domiciled in Florida , non-resident claimants must only file claims in the domiciliary receivership unless such claimants reside in reciprocal states with ancillary receivers. � The final allowance of claims in ancillary proceedings in reciprocal states is conclusive as to the amount and as to priority of special deposit or secured claims. � But it is not conclusive as to priorities against general assets. Filing Claims with Receiver � Section 631.271, Florida Statutes governs the priority of the distribution of claims in a domiciliary proceeding. � The order of distribution of the domiciliary state controls where there is one or more reciprocal states. � However, residents of reciprocal states have equal priority to the payment of their claims from the general assets, regardless of their location. Roles of the Receiver and Court in Evaluating and Approving Claims � The impact of the receiver’s initial evaluation of claims is critical. � See i.e. Bender v. State, Dep't of Fin. Servs. 7

3/27/2015 Claims by the Receiver � The receiver is also required to pursue claims against policyholders or third parties who possess property belonging to the insolvent surety’s or insurer’s estate. � See i.e. In re Receiverships of Southeastern Reinsurance Co . � See i.e. Chase Bank of Texas Nat. Ass'n v. State, Dep't of Ins . I NSURER & S URETY I NSOLVENCY & I TS EFFECT ON C LAIMS P RACTICAL C ONSIDERATIONS Out of State Liquidation Proceedings � Out-of-State claimants from reciprocal states should be treated fairly. � The claimant should file its claims in accordance with the requirements of the domiciliary state. � The initial expense should be limited. � The impact of out-of state stay orders may be disputed by the parties. 8

3/27/2015 Impact on Active Florida Litigation � The claims against the insolvent surety or insurer should be stayed. � Upon receipt of an order of rehabilitation or liquidation, the claimant will need to reevaluate its claim and closely examine other sources of recovery. Claim Submission and Negotiation – The Receiver’s Perspective � Oftentimes the State or Department will appoint attorneys from the private sector to administer the receivership. � The State regulators closely watch and approve the marshalling of assets and their ultimate disposition. � The incentive is to pay claimants, but to treat all claims skeptically to preserve assets and to treat the claimants fairly. � There is no incentive for the receiver to resolve one claim over any other – except when negotiating. Claim Submission and Litigation � The receiver will require a well-documented claim. � The claim approval process may proceed to court, but by statute, it is not a de novo proceeding. � The court is going to be limited to the record established by the claimant. � Therefore, if the receiver determines that the claim is not documented properly, the court will likely sustain the receiver’s determination. � The claimant should therefore focus of provable, hard numbers over less-reliable estimates. 9

3/27/2015 Claim Negotiation � There are two choices: � Submit a fully-documented claim and wait for a final determination (the “wait and see approach”); or � Negotiate a prompt settlement. � Under the “wait-and-see” approach, the costs are less, but the recovery at the end of the insolvency will likely be less (or zero). � Negotiating a prompt settlement it likely the best option, because it will force the receiver to focus on the claim immediately. Case Notes � In re Liquidation of Cumberland Casualty & Surety Co. � In re Liquidation of Centennial Insurance Co. I NSURER & S URETY I NSOLVENCY & I TS EFFECT ON C LAIMS C ONCLUSION 10