Insurance Law

Receivership – New Appleman on Insurance Law Library Edition, Chapter 99

By Douglas Hertlein


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Chapter 99 analyzes all forms of insurer receiverships.  When a commissioner’s regulatory powers, including the power to issue supervision orders, prove to be insufficient to address financial or other operational difficulties of an insurer, state law provides a mechanism for the commissioner to seek an order placing the insurer into receivership and, subject to oversight by the court, the commissioner can then exercise vast powers as a receiver for the troubled insurer.

Section 99.01[1] introduces the state-based framework for insurer receiverships and the general forms of receivership available for troubled insurers: conservation, rehabilitation, liquidation, and ancillary receivership.  Insurers are excluded from being a debtor under the bankruptcy code, so insurer receiverships are a matter of state law.  Consequently, every state has enacted insurer receivership statutes, most of which are based upon model statutes developed over the years by the National Association of Insurance Commissioners.  Section 99.01[2] discusses the statutory structure for insurer receiverships and also discusses the general underlying purposes and objectives for insurer receiverships.

Section 99.02 discusses the types of entities that are subject to receivership under the state insurer receivership statutes.  Traditional insurers are clearly subject to receivership under these statutory provisions. Other entities, while not traditional insurers, provide risk coverage similar to insurance or provide insurance-related services.  The insurer receivership statutes may apply to some of these types of entities.

Section 99.03 addresses issues of jurisdiction and venue for insurer receivership proceedings.  Generally, all receivership statutes provide for exclusive state court jurisdiction over the primary action placing and overseeing an insurer in receivership.  Some statutes even provide for a specific venue within the state for such actions.  Complications, however, arise in regard to other litigated matters that must be resolved in conjunction with an insurer receivership.  There are often disputes over whether the receivership court has personal jurisdiction over other parties related to the receivership and issues of competing jurisdiction between federal and state courts.  These are discussed in Section 99.03.

Section 99.04 addresses procedural issues that are unique in initiating and prosecuting insurer receivership cases.  Section 99.04[1] discusses the procedure for and limitations on initiating a receivership.  Generally, only the insurance commissioner can initiate receivership action against an insurer and the commissioner does so by filing a complaint or petition in the state court as directed by the applicable state receivership statute.

When an insurance commissioner believes that the financial condition of an insurer is so hazardous that it is necessary to assume immediate control of the insurer to protect the interest of the policyholders, creditors, or the public, state receivership statutes provide for a “seizure” procedure whereby the insurance commissioner, on an ex parte basis, can obtain an order vesting immediate control of the insurer and all of its assets in the commissioner.  Section 99.04[2] discusses seizure proceedings.

When an insurer is placed in receivership, there are many parties affected.  Section 99.04[3] discusses the rights of those parties to intervene in the receivership action or to otherwise appear in a limited capacity to protect their interest.  Generally, there are only two actual parties to an insurance receivership; the insurance commissioner as the plaintiff or petitioner, and the insurer as the defendant or respondent.  Thus, while interested parties need the ability to appear and protect their interest, they are not full parties to all rights and interest in the receivership. 

Insurer receiverships also pose unique problems relating to provision of notice and opportunity for hearing on matters presented to the receivership court.  Since a substantial number of parties are always affected by a receivership, and since those parties are generally not parties to the receivership case, receivership courts need to adopt procedures for appropriate notice and hearings for matters presented to the court.  The court’s standard civil rules do not generally adequately address these issues.  In most cases, the receiver recommends and obtains an order from the court establishing notice and hearing procedures for matters to be presented to the court relating to the receivership.  These matters are addressed in Section 99.04[4].

While statutory insolvency is almost always the primary problem or concern of an insurance commissioner who seeks receivership for an insurer, most states provide a variety of grounds for the placement of an insurer in receivership.  Among the common additional grounds are:  (1) financial impairment short of statutory insolvency or other hazardous financial conditions; (2) misfeasance or malfeasance by the insurer’s owners or management; (3) failure to comply with information requests or orders from the commissioner; (4) substantial loss or transfer of the insurers’ assets; (5) failure to comply with statutory filings or other requirements; and (6) abusive claims practices.  Furthermore, within a particular state, the grounds for one form of receivership may be different than for another form.  These grounds for receivership are discussed in Section 99.05.

The powers and duties of a receiver for an insurer are substantial and are discussed in the various subsections of Section 99.06.  These powers and duties arise primarily under the provisions of the receivership statutes, but may also arise through common law or other statutory provisions.  Section 99.06[1] discusses the statutory basis for the receiver’s powers and duties.  The primary and initial power and duty of a receiver is to take possession of and control over all of the insurer’s assets as discussed in Section 99.06[1][a].  Generally, a receivership order grants the receiver the right to immediate possession and control of all of the insurer’s assets. It is important for the receiver to take prompt action to protect and exercise control over those assets to avoid further loss or dissipation.

In the exercise of those powers and duties, the receiver is authorized to continue the employment of officers and employees of the insurer, and also to engage professionals and consultants as necessary.  Section 99.06[1][b] discusses the powers and duties of the receiver in regard to such employment.  A receivership order divests all of the insurer’s directors and officers of their authority to control the insurer’s assets or otherwise manage the insurer.  Nonetheless, it is important for the receiver to retain, at least some of the insurer’s employees and officers to adequately administer the receivership.  The authority of the receiver to engage outside consultants and professionals is somewhat different from the receiver’s authority to continue the employment of the insurer’s officers and employees, and the procedures and limitations for the receiver’s engagement of professionals and consultants differ from the receiver’s retention of employees and officers.  While a receiver generally has the authority to continue employment of the insurer’s employees without any specific notice or approval by the court, the engagement of professionals and consultants usually requires some degree of involvement or approval by the court, which at the very least includes the requirement that the court approve the fees paid to engaged professionals and consultants.

Aside from the expense for employees and outside professionals, the receiver is faced with many other additional costs in administering the receivership.  Section 99.06[1][c] explains the authority and limitations on a receiver’s ability to incur and pay these expenses of administering the receivership.

In addition to the powers and duties granted to a receiver by specific state receivership statutes, common law has developed in many states to clarify or expand the receiver’s powers and duties.  While generally the receiver steps into the shoes of the insurer, the receiver may, by common law, be able to exercise powers and assert defenses in excess of those could have been exercised or asserted by the insurer.  For instance, a court has found that while a receiver may enforce contractual rights under a contract entered into by the insurer, the receiver may not be bound by arbitration provisions contained in that contract.  These are discussed in Section 99.06[2].

While many of the assets of the insurer may be in the possession of the insurer at the time the receiver is appointed, there are also many other assets which the receiver may need to recover from third parties.  Section 99.06[3] explains the receiver’s authority to pursue and recover these assets, including claims that must be pursued through litigation, such as breach of fiduciary duties or professional malpractice and claims that may not arise until the appointment of a receiver, such as statutory preferential transfer claims.  In the whirlwind of a receiver’s assuming control of an insurer upon a receivership order, it is important that the receiver also consider and investigate potential recoveries of these types of assets. 

Another key obligation of the receiver is to protect policyholders and provide for resolution and payment of policyholders’ claims.  The manner in which this is done varies depending on the type of receivership. The receiver’s powers and duties in regard to the adjustment and payment of policyholders’ claims is discussed in Section 99.06[4].

Section 99.06[5] discusses the receiver’s powers and obligations in regard to litigation pending at the time the receivership order was entered as well as the receiver’s obligation to initiate and pursue additional litigation recoveries.  Most receivership statutes provide for at least a temporary stay on all pending litigation to give the receiver time to evaluate the insurer’s position and determine the course of action to be taken.  If a receiver determines to continue prosecuting pending litigation on behalf of the insurer, there are substantial complicating issues if there are counterclaims and cross-claims pending in that litigation.  Allowing the counterclaims and cross-claims to proceed against the receiver violates the receivership stay, but bifurcating them for resolution in the receivership court, may result in duplicative litigation of the same or similar issues.  Additionally, the receiver prosecuting litigation on behalf of the insolvent insurer may not be subject to all of the defenses that could have been asserted against the insurer prior to the receivership.  The receivership statutes also modify limitation periods for the bringing of certain actions upon the entry of a receivership order.

Receivership statutes and receivership orders also generally provide a substantial amount of injunctive relief for the receiver, including mandatory injunctions requiring the former officers and employees of the insurer to cooperate with the receiver and injunctions prohibiting actions against the receiver or the insolvent insurer.  The scope of these injunctions and the receiver’s means and ability to enforce them are discussed in Section 99.06[6]. 

The receivership statutes also give the receiver a great deal of authority in dealing with executory contracts of the insolvent insurer as discussed in Section 99.06[7]. In some cases, a receiver may assume an executory contract and enforce the obligations of the other parties to the contract, while at the same time avoiding some of the obligations that the insurer had under the contract.

Because all receiverships are initiated through court action and operate under the authority of the receivership court, receivership statutes generally obligate the receiver to provide various reports to the court.  While these reporting requirements vary substantially from state to state, in all states, the receiver is required to make at least some reporting to the court of the financial condition and operations of the receivership.  Section 99.06[8] examines issues relating to reporting to the court. 

The entry of a receivership order also changes the landscape for all of the parties with an interest in or dealings with the insurer prior to receivership.  Section 99.07 discusses the rights and obligations of interested parties in dealing with the receiver.  Among these are the obligations of the insurer’s former officers and directors to cooperate with the receiver.  These employees and officers hold much of the institutional knowledge for the insurer and without their cooperation, the receiver will encounter substantial difficulties or delays in administering the receivership efficiently.  Despite the obligation of these officers and employees to cooperate, it may be difficult for the receiver to obtain their full cooperation, particularly if the former officers and employees anticipate the termination of their employment or the possibility that the receiver may bring claims against them for their management of the insurer prior to the receivership.  All of these issues are discussed in Section 99.07[1]. 

Oftentimes, parties in interest seek to challenge actions taken by the receiver.  To do so, however, the party in interest must usually show that it has adequate standing and interest in the matter being challenged.  This is discussed in Section 99.07[2].  In addition, a variety of actions taken by the receiver are subject to review and approval by the receivership court.  The need for judicial review of  actions taken by the receiver is discussed in Section 99.07[3].

In regard to challenges to actions taken by the receiver, the receivership statutes generally provide at least some degree of immunity to the receiver.  The extent of this immunity and the extension of immunity to employees and consultants working on behalf of the receiver are discussed in Section 99.07[4]. 

The entry of a receivership order has substantial impact on the insurer as well as a variety of other parties with an interest in or dealings with the insurer prior to the receivership.  Section 99.08[1] discusses the effect of the receivership order on the insurer.  The effect on the insurer’s operations varies depending on the type of receivership, ranging from virtually no impact in some conservation and rehabilitation receiverships to a dramatic impact upon entry of a liquidation order.  Section 99.08[2] addresses pending litigation by and against the insurer, which is also affected by the receivership order.  The effect again varies depending on the nature of the receivership, but in most cases, there is at least a temporary stay of pending litigation included as part of the receivership order.  However, the enforcement of these stays can oftentimes be difficult for the receiver. Additionally, those stays are limited as to the types of actions that are stayed, primarily focusing on staying any actions that would deplete the assets of the receivership estate or interfere with the receiver’s administration of the estate.  The effect of a receivership order on policyholders and policyholders’ claims is also quite different depending on the type of receivership ordered and the authority and discretion of the receiver to handle claims within the various types of receivership, ranging from virtually no impact on the ongoing review and payment of claims to the termination of policy coverage and a complete stoppage of payments on policyholder’s claims.  These effects are discussed in Section 99.08[3].  As with policyholders’ claims, the claims of non-policyholder creditors are affected differently depending on the type of receivership.  In a non-liquidation receivership, the receiver may, but usually does not, continue payments to non-policyholder creditors for pre-receivership obligations.  In a liquidation, the receiver is statutorily prohibited from making payments on pre-receivership obligations, except in very limited circumstances.  This impact on non-policyholder creditors is discussed in Section 99.08[4]. 

The effect of a receivership order on officers and employees of the insurer also depends on the type of receivership and the plan for the receivership.  Not only do officers and employees have obligations to continue to cooperate with and assist in the receivership, in many cases they may face loss of their employment or even being named as a defendants in an action brought by the receiver.  As to owners of the insurer, while they retain their ownership interest in the insurer, all of the powers of the directors and officers of the insurer vest with the receiver, and consequently, the entry of a receivership order substantially limits the owners’ ability to have any control over the insurer.  All of this is discussed in Section 99.08[5]. 

Rehabilitation and liquidation receiverships are discussed separately in Chapters 100 and 101, respectively, below.  While those are the two primary forms of receiverships, in some states the receivership statutes provide for a third form of receivership known as “conservation.”  Section 99.09[a] discusses conservation receiverships for those states in which they are authorized.  Generally the powers and duties of a receiver in conservation are similar to those of a receiver in rehabilitation, except that they are more limited in time.  Conservation is intended to be a short-term receivership during which the receiver determines a future course of action that will best address the insurer’s financial and other operating difficulties. 

All insurer receivership statutes also provide for a form of receivership known as an “ancillary receivership”.  These are receiverships obtained by an insurance commissioner in a state other than the one in which the troubled insurer is domiciled.  Ancillary receiverships arise generally under two scenarios.  The first is where the insurer has assets in the non-domiciliary state, which the commissioner believes can best be preserved or protected through a receivership in that non-domicile state.  The second is where there are a substantial number of policyholder claimants in a non-domicile state and the commissioner of that state determines that establishing an ancillary receivership to receive and adjudicate those policyholders’ claims is in the best interest of the policyholders.  Ancillary receiverships are addressed in Section 99.09[2].

Finally, at some point in every receivership it is necessary to terminate the receivership proceedings.  The timing and procedures for terminating a receivership proceeding are discussed in Section 99.10.  In essence there are two bases for termination of receivership proceedings: either the insurer has been restored to financial health and can be returned to operations outside of receivership; or the operations of the insurer have been runoff, sold, or liquidated such that there are no remaining assets to be administered for the insurer and all claims have been addressed to the extent of available assets.

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Table of Contents

§ 99.01 Framework for Insurer Receiverships

[1] Types of Receiverships

[2] Statutory Authority and Purpose Underlying Insurer Receiverships

§ 99.02 Entities Subject to Insurer Receivership Statutes

§ 99.03 Jurisdiction and Venue for Receivership Proceedings

§ 99.04 Procedural Issues That Are Unique to Receiverships

[1] Commencement of Receivership

[2] Ex Parte Seizure Proceedings

[3] Appearance and Rights of Parties in Interest

[4] Notice and Hearing Procedures

§ 99.05 Grounds for Appointment of Receiver

§ 99.06 Powers and Duties of Receiver

[1] Statutory Basis for Powers and Duties

[a] Exercise of Possession and Control Over Assets of Insurer

[b] Employment of Professionals and Others

[c] Authority to Incur and Pay Administrative Expenses

[2] Common Law Basis for Powers

[3] Authority to Recover Assets

[4] Adjustment and Payment of Policyholders’ Claims

[5] Initiation and Prosecution of Litigation

[6] Injunctive Relief Available to Receiver

[7] Authority in Dealing With Executory Contracts

[8] Requirements for Reporting to Court

§ 99.07 Working With and Challenging Receivers’ Actions

[1] Cooperating and Working With the Receiver

[2] Standing and Basis for Challenging Receivers’ Actions

[3] Judicial Review of Receivers’ Actions and Disputes with Parties in Interest

[4] Immunity Protections Granted to Receivers

§ 99.08 Effects of a Receivership on Parties in Interest

[1] Effect on Insurer Upon Entry of Receivership Order

[2] Effect on Pending Actions by and Against Insurer

[3] Effect on Policyholders and Policyholders’ Claims

[4] Effect on Non-Policyholder Creditors

[5] Effect on Owners, Officers, and Employees

§ 99.09 Special Types of Receiverships

[1] Conservation

[2] Ancillary Receiverships

§ 99.10 Timing and Procedure for Terminating Receiverships

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