Allocation 201: Who Pays Insolvent Shares?

Posted on July 19, 2011 by Mike Aylward

While more and more jurisdictions have rejected policyholder "all sums" claims in long-tail suits, there is still a striking lack of uniformity in the approach that these courts are taking to individual allocation issues.  In particular, there is a major division as to whether allocation applies to the entire period of injury or just those years for which insurance is "available."    This division reflects the thinking of some courts, led by the New Jersey Supreme Court's original Owens-Illinois opinion, that allocation is not necessarily a function of policy wordings but, rather, a public policy tool that should be applied to encourage policyholders to transfer risk by purchasing insurance and to punish them for failing to do so.

Five years ago, the Minnesota Supreme Court adopted the "unavailability" exception to pro rata allocatio in a construction defect case.  In Wooddale Builders, Inc. v. Maryland Cas. Co.,, 722 N.W.2d 283 (Minn. 2006), the Court declined to allocate loss to the years after 2002 because the insured had allegedly been unable to buy coverage for water intrusion losses after that date.

In light of Wooddale, questions remain with respect to what it means for insurance to be "unavailable."  In particular, is insurance "unavailable" because of an insurer's insolvency?

There are a legion of cases in which courts have held that insolvent insurance is "unavailable" to a policyholder.  However, these are all "other insurance" cases in the context of an excess carrier's claimed drop down duties.  Should the same logic apply to allocation?

In H.B. Fuller Co. v. U.S. Fire Ins. Co., No. 09-02827 (D. Minn. July 18, 2011), Judge Tunheim ruled yesterday that Wooddale does not apply to carrier insolvency.  The District Court ruled that the Supreme Court's discussion of "availability" was only meant to apply in the context of when insurance was generally unavailable in the marketplace.   Further, citing case law from other jurisdictions, Judge Tunheim declared that it made sense to place this burden on the insured, who was the party that had chosen to buy insurance from the company that later went insolvent, rather than other insurers, who had been strangers to the transaction.

 

Tags: , , , , , ,

New Hampshire Supreme Court Refuses Relief For Home's Lawyers

Posted on February 24, 2009 by Mike Aylward

As the storm clouds gather over once might insurance companies, law firms representing insurers should bear in mind the on-going lessons of the insolvency of Home.  Lawyers representing an insurer in perilous financial circumstances face the dilemma of trying to protect their client’s interests even in the face of looming insolvency while trying to avoid being left holding the bag with a large unpaid bill. Such was the unhappy fate of the Sheiness law firm of Houston, Texas in the latest opinion of the New Hampshire Supreme Court arising out of the June 2003 insolvency of the Home Insurance Company.


Sheiness Scott Grossman & Cohn LLP had been engaged by Home in 2002 to defend it against efforts Home’s insured J.T. Thorpe to impose a 524(g) bankruptcy to resolve its asbestos liabilities. Despite rampant rumors that Home might collapse any date, the firm could took on the case and put a great deal of time and effort into it over a period of a few months, ultimately minimizing what might otherwise have been a far more serious problem for Home.

As of the date that Home was declared insolvent, the firm was owed $74,7845. SSGC duly placed a claim for this amount with Home’s liquidator in New Hampshire. The liquidator approved the claim but assigned it a Class V residual priority and observed that the limited funds in the estate made it unlikely that anything but Class I and Class II claims would be paid.

In its appeal to the New Hampshire Supreme Court, SSGC advanced two arguments. First, that its fees were in fact Class I costs of administration, which are stated by RSA 402-C:44, I to include “reasonable attorney’s fees.” In the alternative, it advanced an equitable argument, suggesting that a refusal to reimburse lawyers who had loyally served the interests of the insurers prior to insolvency would create a disincentive in the future for other firms called to provide similar services and make it harder for insurers to protect their interests.

As to the first argument, the Supreme Court held that RSA 402-C:44 clearly distinguished between legal services incurred in connection with the administration of the insurer’s liquidation and pre-liquidation legal services. The court found that the language of the statute, which speaks in terms of an “estate” and “administration,” clearly contemplated work done after liquidation had already begun.

Despite the law firm’s argument that denying them payment would create a disincentive for any future law firm to ever continue to defend insurers that were in financial peril, the court observed that it could not discern “any principled way to distinguish between the fee for SSGC’s pre-liquidation legal representation and the fees of other pre-liquidation professionals falling within the residual classification of RSA 402-C:44, V.

The court’s comments clearly suggest its concern that allowing SSGC’s claim would open the floodgates to other law firm claimants and substantially dilute the funds available to pay claims that may be brought by other Home creditors, including large policyholders and state Guaranty Funds. At the same time, one can only see this as rough justice for a law firm that did was it was ethically bound to do on behalf of a client in trouble.
Tags: , , , , , , ,

Asbestos IBNR Outside New Jersey Statute For Liquidation of Insolvent Insurers

Posted on December 20, 2007 by Mike Aylward
The New Jersey Supreme Court has ruled that thousands of asbestos claims and other long-tail liabilities that have been incurred but not yet reported do not qualify for inclusion in the distribution of the estate of an insolvent insurer as N.J.S.A. 17:30C-8(a)(1) provides that “no contingent claim shall share in the distribution of the assets of an insurer” except as such claims have become “absolute against the insurer.” In In The Matter of Liquidation of Integrity Ins. Co., No. A-91-06 (N.J. December 13, 2007), the court rejected the Liquidator’s argument that IBNR claims become “absolute” once their value is susceptible of being estimated. Instead, the majority declared that “because the process by which the Liquidator proposes to estimate IBNR claims of necessity entails looking outside of each claim to other similar claims in respect of their very existence, nature and extent and cost, IBNR claims fail to satisfy that most basic element of requirements in order to be “absolute”: [that each] stand on its own and not by reference to any other claim.” Two dissenting justices argues that the majority’s analysis created an unreasonable “Hobson’s choice” for the Liquidator, as it must either pay out the limited assets of the Estate now and leave future claimants without relief or delays payments indefinitely while the Estate meanwhile “hemorrhages” administrative costs.
Tags: , , , ,

Guaranty Fund Act Revisions Under Consideration

Posted on December 4, 2007 by Mike Aylward

The National Conference of Insurance Legislators (NCOIL) is poised to adopt new model legislation governing the role of state guaranty funds in responding to the insolvency of property and casualty insurers. T

he proposed model legislation, which was approved by NCOIL’s property and casualty insurance committee on November 16, 2007, comes in response to complaints that most model acts, which were adopted pursuant to the 1970 National Association of Insurance Commissioners 1970 recommendation, are outdated and do not reflect the complexity and realities of today’s insurance marketplace. The NCOIL action comes at a time when the NAIC model, which was adopted in 1970 and last amended in 1996, is currently being reconsidered by an NAIC receivership and insolvency task force.


PROPOSED CHANGES
These proposals would amend the current Model Act in several significant areas, including the following:

1. Statutory Caps
At present, guaranty funds are limited to $300,000 per claim. The NAIC is considering increasing this limit to $500,000. The NCOIL draft leaves the $300,000 cap in place but would give states the option of setting a higher claim limit where appropriate.

2. Treatment of "Assumed Business"
The NCOIL model maintains existing NAIC language limiting guaranty fund obligations to policies that are written through admitted carriers. The draft NAIC proposal would extend coverage to non-admitted carrier risks that were later entered into assumption transactions with licensed carriers.

3. Net Worth Limitations
The current NAIC model caps guaranty fund participation at $25 million net worth for first party insureds and $50 million for casualty policies. The NCOIL proposal would reduce these thresholds to $10 million and $25 million respectively on the theory that high net worth policyholders are able to handle the risk of insolvencies without guaranty fund participation.

4. Claim Bar
Under existing law, the claim bar date is set by the court overseeing an insolvent insurer’s liquidation. The NCOIL proposal would establish a separate bar date of 18 months after the order of liquidation as an alternative to the liquidators bar date and whichever date is earlier would be used.

5. Claim Servicing
The NAIC and NCOIL proposals differ with respect to whether the receiver of an insolvent estate may act as the guaranty fund servicing facility, a practice that is presently prohibited by many states. The draft NAIC proposal would now allow the receiver to act as the servicing facility whereas the NCOIL model would maintain the present prohibition against this practice.

6. Coverage Litigation
At present, the guaranty fund has no express right to intervene in court proceedings. The NCOIL proposal would allow it to intervene in proceedings taking place in the court that has jurisdiction over the insolvent insurer.

7. Bad Faith Claims Against Guaranty Funds 
Finally, the NCOIL and NAIC proposals differ with respect to whether guaranty funds will continue to be protected against allegations of bad faith claims handling. The NCOIL proposal would maintain current NAIC language that protects guaranty funds against claims of bad faith or punitive damages whereas the NAIC model language would permit tort claims for misconduct that is unrelated to the fund’s obligation to pay covered claims.

Tags: , , , ,

National Union Fire Ins. Co. v. Mississippi Insurance Guaranty Association

Posted on November 20, 2007 by Mike Aylward
The Fifth Circuit has asked the Mississippi Supreme Court to answer whether a medical malpractice insurer whose “other insurance” clause made it excess to PHICO must nonetheless accept coverage in light of PHICO’s insolvency or whether the State Guaranty Fund bore responsibility.   Earlier this year, the supreme court ruled that the exhaustion requirements of Miss. Code Ann. §83-23-123 did not apply to coverage available to a co-defendant, holding in Mississippi nsurance Guaranty Association v. Cole, 954 So.2d 407 (Miss. 2007) that the MIGA’s obligations were not excused by sums paid by the insurer of a joint tortfeasor.
Tags: , , , ,