Considerations for directors of troubled insurance companies: what are the key concerns a director should have if his or her insurance company is, or may soon be, insolvent?

Author:McDonald, Matthew M.

In October 2001, Reliance Insurance Co., a Philadelphia-based property/casualty insurance company, was declared insolvent by the Pennsylvania Insurance Department, making Reliance the largest property/casualty insurer ever to be declared insolvent in the United States.


Reliance had been under control of the Pennsylvania Insurance Department since May 2001 after it began to appear that the insurer would be unable to satisfy claim obligations and repay its mounting debt. Disruptions in the reinsurance market caused by the attack on the World Trade Center exacerbated Reliance's inability to pay claims and ultimately sped the decision of Pennsylvania Insurance Commissioner M. Diane Koken to liquidate, rather than rehabilitate, the company. At the time the decision to liquidate Reliance was made, the company was found to be insolvent by approximately $1.1 billion.

In 2002, Commissioner Koken filed a civil action against Saul P. Steinberg, Reliance's chairman, and 16 other officers and directors of Reliance. In the suit, the directors of Reliance are claimed to have breached their fiduciary duties to Reliance and its stakeholders, including the duties of care and loyalty. These claims stem in part from allegations that, despite poor underwriting performance, Reliance transferred approximately $500 million to its holding companies through loans, tax payments and dividends. These funds were, in turn, distributed to the shareholders of the holding companies, including Mr. Steinberg. After years of legal maneuvering, the suit was settled in 2005 for approximately $85 million.

While it may be easy to conclude that the behavior of the chairman and other directors in the Reliance matter was egregious, the case does highlight the scrutiny that the directors of insurance companies can face should their companies be found to be insolvent. Given the highly regulated nature of the insurance industry, what are the key concerns a director should have if his or her company is, or may soon be, insolvent?

Basic Fiduciary Duties

First, the director of the insurer must be aware of the fiduciary duties that the directors of all corporations owe to the corporation and its stockholders. The exact nature and extent of these fiduciary duties vary from state to state, and may be driven by statute or case law precedent. The two most common duties, however, are the duty of care and the duty of loyalty.

The duty of care requires that a director must...

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