Liquidation – New Appleman on Insurance Law Library Edition, Chapter 101

Liquidation – New Appleman on Insurance Law Library Edition, Chapter 101

By Katherine Billingham

Abstract

Liquidation of an insurance company is the equivalent of a Chapter 7 bankruptcy and is the remedy of last resort for an insurer in financial difficulty. This chapter examines the timing, purpose and grounds for liquidation, as well as the process of the liquidation from the commencement of the proceedings to the winding up of the affairs of the liquidated insurance company. The powers and duties of the liquidator are also discussed.  Additionally, this chapter addresses the impact of the liquidation on policyholders, debtors and creditors, as well as their rights and responsibilities.

This chapter begins with an overview in Section 101.01 of the state statutory framework governing liquidation proceedings. In general, state insurance regulators have discretion to liquidate insolvent, mismanaged, or financially troubled insurers to protect policyholders, claimants, creditors, and the public.  Section 101.02 reviews the process for the commencement of  liquidation proceedings. State insurance commissioners are empowered to initiate liquidate proceedings in state courts. Parties including policyholders, creditors, and state guaranty associations have limited rights to participate in the process. The chapter next examines the role of the  liquidator in Section 101.03.  State statutes prescribe the liquidator’s powers and duties. The liquidator is responsible for notifying policyholders and creditors of the liquidation. In general terms, the liquidator takes possession of and distributes the insurer’s assets, including investments, real property, sums owed the insurer, and reinsurance receivables, with the help of various professionals and personnel of the insolvent insurer, and supervised by the court.  The liquidator also has the power to pay administrative expenses, handle claims, sue on behalf of the insolvent insurer, obtain injunctions against officers and directors from conducting further business on behalf of the insurer, and dispose of assets. The liquidator and professionals retained by the liquidator are immune from suit.

Section 101.04 examines the effect of the liquidation order. The liquidation order fixes the rights, duties, and liabilities of all parties affected by the liquidation, including the insurer, its creditors, and the policyholders.  Generally, a liquidation order stays pending litigation against the insurer but does not prevent litigation by the liquidator. The insurer’s policies are cancelled within a specified period of time after entry of the liquidation order, except for annuities and life, disability, long term care, and health insurance policies. Claims under policies are typically paid by the state insurance guaranty association. Liquidation does not affect secured creditors or setoffs of mutual obligations.

Section 101.05 examines claims procedures. The liquidator must notify creditors of the liquidation and procedures, including deadlines, for filing claims. Claimants have the burden of proof. If a claimant objects to the liquidator’s determination, the matter may be heard by the court.

The process for the distribution of the assets is reviewed  in Section 101.06.   State insolvency statutes prioritize distributions. Expenses of administrating the liquidation have first priority, typically followed by guaranty associations and claims under insurance policies, with claims of general creditors generally last. This section also discusses early access to funds by the insurance guaranty associations, interim distributions, court approval, and the status of unclaimed funds.

Lastly, Section 101.07 reviews the process for the closing of the estate, including the destruction of records, the final accounting, discharge of the liquidator and the grounds for the reopening of the liquidated estate.

Cross References: For a discussion of the remedy of receivership, see Chapter 99 above. For a discussion of the remedy of rehabilitation, see Chapter 100 above.

Katherine Billingham graduated in 1982 from Stetson University College of Law and is admitted to practice in Florida, Ohio and North Carolina. She litigated insurance defense cases in Tampa until 1984 and then became in-house counsel with the Universal Reinsurance Corporation and its affiliates. She left there as Vice President and General Counsel in 1990 to start her own law firm.  Her practice included insurance coverage cases for environmental, asbestos and other commercial general liability exposures, as well as reinsurance arbitrations.  From 2004-2008 she also served as a Reinsurance Consultant to the Ohio Insurance Department Liquidation Office.  Since 2004, much of her professional time has been dedicated to offering arbitrator and mediator services. She has given numerous presentations in New York City, Chicago, Washington and London, and has published several articles on ADR in insurance and reinsurance.  She is also an Assistant Professor at the Charlotte School of Law and Director of its ADR program.  This chapter was drafted in consultation with Douglas Hertlein is a partner at the law firm of Allen Kuehnle Stovall & Neuman LLP in Columbus, Ohio.

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TABLE OF CONTENTS

§ 101.01 Liquidation Generally

[1] The Process of Liquidation of Insurance Companies Is Governed by State Statutes

[2] The Purpose of Liquidation Is to Wind up the Insurer’s Business Efficiently and to Protect the Public Purpose

[3] Grounds for Liquidation

[4] Model Acts on Which Statutes Are Based

§ 101.02 Commencement of Liquidation Proceedings

[1] Procedures

[2] Parties With Rights to Participate

§ 101.03 Liquidators

[1] Appointment of Liquidator

[2] Notice to Policyholders and Creditors

[3] Powers and Duties of Liquidator

[a] Primary Tasks Are Marshaling and Administering the Insurer’s Assets

[b] Basis for Powers

[c] Marshaling of Assets

[i] Assets of Insurer

[ii] Collateral

[iii] Earned and Unearned Premium

[iv] Reinsurance

[d] Appointment of Professionals and Other Contractors

[e] Administrative Expenses

[f] Handling Claims

[g] Power to Sue

[h] Injunctions

[i]  Executory Contracts

[j]  Disposing of Assets

[k] Distributing Assets

[l] Reporting to Court

[4] Challenging Actions of the Liquidator

[a] Basis for Challenging Actions

[b] Judicial Review

[5] Liquidator Immunity

§ 101.04 Effects of Liquidation Order

[1] Assets and Liabilities Fixed as of Liquidation Order

[2] Effect of Liquidation Order on Insurer

[3] Effect of Liquidation Order on Agents

[4] Effect of Liquidation Order on Litigation Against Insurer

[5] Effect of Liquidation Order on Ligation by Insurer

[a] Role of Liquidator in Pursuing Litigation

[b] Tolling of Statute of Limitations

[6] Effect of Liquidation Order on Policyholders

[a] Cancellation of Coverage

[b] Pending Claims

[c] Insurance Guaranty Associations

[d] Post-Liquidation Claims

[e] Assessments

[7] Effect of Liquidation Order on Creditors

[a] Secured Creditors’ Claims Preserved

[b] Setoff Allowed for Mutual Debts and Credits

[8] Effect of Liquidation Order on Owners, Officers and Employees

§ 101.05 Claims Procedures

[1] Types of Creditors

[a] Policyholders

[b] Claimants

[c] Other Creditors

[2] Presentation of Claims

[a] Liquidator Notice and Due Process Requirements

[b] Proofs of Claim

[c] Time Limits for Presentation of Claims

[3] Assignment of Claims by Creditors

[4] Cut-Through Clauses in Reinsurance Agreements

[5] Judicial Review of Claims

§ 101.06 Distributions to Creditors

[1] Distribution Process Generally

[2] Priority Classes

[3] Early Access

[4] Interim and Final Distributions

[5] Setoffs

[6] Unclaimed Funds

[7] Court Approval

§ 101.07 Closing the Liquidation

[1] General Procedures

[2] Destruction of Records

[3] Closing Accounting

[4] Discharge of Liquidator

[5] Reopening Liquidation

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