Chapter Thirty-Six
| Jurisdiction | New York |
Chapter Thirty-siX
Financially Impaired Insurers
Ellen M. Dunn, Esq. Stephen W. McInerney, Esq.*
* Ellen M. Dunn is a partner and Stephen W. McInerney is an associate in the Insurance and Financial Services Group of Sidley Austin LLP.
Under New York law, like in most states, an insurer is financially impaired if it (1) cannot pay its claims or debts; (2) has inadequate reserves; or (3) has engaged in conduct that violates the law. The New York State Legislature adopted a version of the Uniform Insurers Liquidation Act, which sets forth the salient principles regarding the administration and conduct of impaired insurers in New York. That legislation appears in article 74 of the N.Y. Insurance Law (Insurance Law).
I. Remedies Available to Impaired Insurers
New York law provides that an impaired insurer may be placed in either rehabilitation5208 or liquidation.5209 The purpose of rehabilitation is to attempt to cure the insurer’s financial problems under court-ordered protection from litigation. In both rehabilitation and liquidation, the New York Superintendent of Insurance (Superintendent) must obtain an order from a New York State court permitting the company to be placed under the Superintendent’s care.5210 The goal of rehabilitation is for the insurer to emerge as a viable company pursuant to a court-approved plan. The closest analogy in bankruptcy is a Chapter 11 reorganization.
In contrast, the purpose of liquidation is to sell the insurer’s assets and collect debts to maximize value for the estate. The insurer’s business affairs are to be “wound up” pursuant to a court-approved plan. The closest analogy in bankruptcy is Chapter 7 liquidation.
In both rehabilitation and liquidation the regulator runs the company. The company’s management and board are stripped of their authority.5211 Occasionally, the regulator will grant a role to management in rehabilitation but that is unusual. In New York, like other states, the regulator in charge of the impaired insurer is usually the Insurance Commissioner in the state where the insurer is domiciled.5212 The Superintendent, as regulator-in-charge, may appoint a designee to act as rehabilitator or liquidator.5213
Unlike many other states, New York has no explicit provision for supervision. Supervision, which does not require a court order, allows the regulator to review and approve management’s actions and to attempt to cure financial or other defects through that review without assuming full control over the company. Although there is no explicit provision for supervision in Insurance Law article 74, informal supervision in New York is common and can be triggered, for example, by adverse risk-based capital levels.5214
An insurer may be placed into rehabilitation or liquidation with or without the consent of management. In order to place a company into rehabilitation or liquidation, the Superintendent must obtain an order to show cause from a New York State court.5215 The court has the power to place the insurer into rehabilitation or liquidation temporarily, pending a full hearing.5216
Regardless of whether rehabilitation or liquidation is contested by management, the Superintendent must show, in order to place the company into rehabilitation or liquidation, that the insurer meets one of a number of criteria, including that (1) the insurer is impaired or insolvent; (2) the insurer has willfully violated the law; (3) the insurer’s continued operation is hazardous to its policyholders or the public; or (4) the insurer has ceased doing business for one year or more.5217 If the insurer has significant assets in other states, the insurance commissioners in those states may apply for an order directing them to conserve the insurer’s assets in that state.5218 These orders establish what is known as an ancillary receivership.
II. Once an Insurer Is Placed Into Rehabilitation or Liquidation, What Happens?
After an insurer is placed into rehabilitation, the Superintendent alone is charged with removing the causes that resulted in the placement of the insurer into rehabilitation.5219 The Superintendent, together with his or her designees, runs the company. Often, there is no set time frame within which the Superintendent must complete rehabilitation of the company.5220 The Superintendent may sell or dispose of company assets.5221 Usually, all pending litigation against the insurer is stayed, both in and out of New York,5222 and the Superintendent is given authority to pursue causes of action belonging to the company, its policyholders and creditors.5223
In liquidation, the Superintendent alone is charged with marshaling or selling assets to maximize the value for the estate. The Superintendent and his or her successors in office run the company.5224 As in rehabilitation, there is often no set time frame within which the liquidation must be completed. All pending litigation against the insurer may be stayed.5225 The Superintendent also may pursue litigation on causes of action belonging to the insurer, its policyholders or creditors.5226 Specifically, the Superintendent “stands in the shoes” of management and may take any action management was empowered to take.5227
III. Claims in Liquidation
When a company is placed into liquidation, notice is generally provided to its creditors that claims and proof of claims should be filed in the liquidation proceeding.5228 A claim is an assertion that payment is owed by an impaired insurer. Claims may be filed for (1) specific losses or occurrences arising under the coverage of an insurance policy; (2) return of unearned insurance premium due to early cancellation of an insurance policy; (3) commissions or fees; (4) unpaid legal expenses; or (5) other unpaid invoices.5229
Claimants include policyholders or insureds, agents and brokers, attorneys, litigants and general creditors. A claim is generally made by making a filing with the rehabilitator or liquidator.5230 The filing must generally include, in reasonable detail:
• the claim;
• the consideration for the claim;
• any securities held for the claim;
• any payments made on the claim; and
• a statement that the claim is justly owing from the insurer.5231
All claims must be accompanied by supporting documentation5232 and be filed by a date specified by the liquidator and the court.5233
To disallow a claim, the liquidator must report the claim to the court and specify the action that he or she recommends. The court then fixes a time for a hearing, provides notice of the hearing and then allows or disallows the claim.5234 The court’s order allowing or disallowing the claim is an appealable order.5235
Like most states, New York has a statutory priority scheme for distributing assets of the impaired insurer in order to pay claims. The priority scheme set forth in New York for all insurers, except life insurance companies, generally is as follows:5236
• Class one: the Superintendent’s administrative costs and expenses for acting as liquidator or rehabilitator.
• Class two: claims under policies by any level of government for losses incurred by third parties, and for unearned premiums; claims by a security fund, guaranty association or the equivalent, except for claims arising under reinsurance contracts.
• Class three: all other claims of the federal government.
• Class four: wages owed to the insurer’s employees for services within one year prior to the commencement of rehabilitation/liquidation proceedings (capped at $1,200/employee); claims for unemployment insurance contributions.
• Class five: all other claims of state and local governments.
• Class six: claims of general creditors, including claims under reinsurance contracts.
• Class seven: claims filed late and any other claims not covered under any other class.
• Class eight: claims for advanced or borrowed funds made pursuant to Insurance Law § 1307.
• Class nine: claims of shareholders or other owners in their capacity as shareholders.
The priority scheme for life insurance companies generally is as follows:5237
• Class one: the Superintendent or guaranty association’s administrative costs and expenses for acting as liquidator, rehabilitator, or guaranty association.
• Class two: debts owed to the insurer’s employees for services within one year prior to the commencement of rehabilitation/liquidation proceedings (capped at $1,200/employee).
• Class three: claims for payment for goods/services rendered to the impaired insurer in the ordinary course of business within 90 days prior to the date the insurer was determined to be impaired or insolvent.
• Class four: claims under insurance policies and annuity contracts; claims of guaranty association other than its claims in class one.
• Class five: claims of any level of government, limited to the extent of the pecuniary loss sustained from the insurer’s act along with reasonable costs—the remainder of such claims are placed in class eight.
• Class six: claims of general creditors and any other claims not covered under any other class.
• Class seven: surplus, capital, or contribution notes or similar obligations.
• Class eight: claims of policyholders other than under class four; claims of shareholders or other owners.
Other rules also affect claim payment. For example, the rehabilitator or liquidator is permitted to avoid fraudulent transfers or transactions. This means that every obligation incurred by the impaired insurer within one year prior to the granting of an order placing the insurer into rehabilitation or liquidation is fraudulent if (1) it is made with the intent of enabling a creditor to recover a greater percentage of his or her debt than any other creditor of the same class; and (2) the creditor has reasonable cause to believe that this preference will occur.5238
Similarly, New York has rules relating to payment of contingent claims. In a distribution of the assets of an insolvent insurer, a contingent claim is only allowed if (1) it becomes absolute against the...
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