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Insurance Law

Rehabilitation Of Insurers – New Appleman on Insurance Law Library Edition, Chapter 100

By Patrick H. Cantilo, Mark F. Bennett, Arati Bhattacharya



This chapter addresses the rehabilitation of insurers.  In general, upon the advent of receivership proceedings (for purposes of this chapter, any proceeding through which state insurance regulatory officials or their designees are given at least temporary control of the insurer by a court of competent jurisdiction for purposes of rehabilitation or liquidation), state officials first determine whether rehabilitation is reasonably feasible and, if so, pursue that course.  To be sure, there are cases in which it is evident at the outset that rehabilitation is not reasonably feasible, and cases in which rehabilitation efforts are eventually abandoned and the proceeding converted to one for liquidation.  This chapter will examine the process for appointing a rehabilitator, his or her powers and duties, the rehabilitation process (including rehabilitation plans), and the conclusion of rehabilitation or conversion to liquidation.

What is rehabilitation?  There are as many answers to this question as there are “rehabilitation experts” responding.  More importantly, the answer may depend on the constituency posing the question. Rehabilitation may be materially different for a shareholder than for a reinsurer or policyholder.  Full claims payments, preservation of coverage, preservation or restoration of licenses, maintaining employment, sale of new business, surplus generation, and release from regulatory control, are all important goals that play a role in defining the success of a rehabilitation.   “Rehabilitation” is not a universally accepted condition; rather “rehabilitation” occurs where the lot of at least some affected constituencies improves beyond what might have been expected in a liquidation.

In a meaningful sense, rehabilitation is actually a spectrum of possible outcomes, the particular one selected in a specific case dependent on the characteristics of the case.  In the most successful cases, rehabilitation may consist of the insurer remaining intact (perhaps only ownership having changed) and resuming the sale of new business with reasonable assurances that all contractual obligations will be met timely.  This result is seldom achieved.  Perhaps at the other end of this spectrum is a plan that results in dissolution of the insurer and policyholders being paid in full or in part, albeit with guaranty associations participating voluntarily in some manner even though not required to do so (see Section§ 100.04[5]).  Between these extremes are plans which pay policyholders fully without guaranty fund contributions, plans which additionally make partial or complete payments to lower priority creditors, arrangements which reduce policy benefits through restructured contracts and pay those in full, plans which call for sale of part of the company into the market while the rest is liquidated, and myriad other variations on these themes.  The courts have at times adopted varying definitions for rehabilitation (see 100.01.)

Unlike the Insurers Rehabilitation and Liquidation Model Act (the “Model Act”) it was intended to replace, the NAIC Insurer Receivership Model Act (Model 555) (“IRMA”) adopted by the National Association of Insurance Commissioners (“NAIC”) in 2005 devotes an entire section (Article IV) to rehabilitation.  However, IRMA does not define rehabilitation.  A definition is offered in this chapter solely for purposes of providing organizational context for the matters considered.

Section 100.01 of this chapter considers various definitions of insurance rehabilitation proceedings, emphasizing the goals and purposes of such proceedings.  Rehabilitation will be distinguished from other state regulatory proceedings to which a troubled insurer may be subjected, including liquidation, supervision, and conservation.  State proceedings typically commence with supervision, proceed to conservation and rehabilitation, and culminate in liquidation. However, these proceedings differ among the states and the lines between them do not always divide them neatly.  Moreover, rehabilitation may be an unstated but overriding goal of all these proceedings short of liquidation.  Narrowly, then, rehabilitation might be defined as a proceeding in which the relevant state official (typically the insurance commissioner) is ordered and authorized by a court of competent jurisdiction to rehabilitate (not liquidate) the insurer.

In addition, Section 100.01 of this chapter will compare state-based insurance rehabilitation proceedings with reorganization under 11 U.S.C. § 1101 et seq., Chapter 11 Bankruptcy.  The distinction is important for insolvency practitioners because certain differences are fundamental.  For example, state insurance rehabilitation proceedings do not make provision for management control comparable to the debtor-in-possession provisions of the bankruptcy code.  Neither do they institutionalize creditors’ committees in the way bankruptcy does.   Beyond that, Chapter 11 is much more specific and detailed in addressing reorganization plans than are state receivership laws.

Section 100.02 describes common statutory grounds for the commencement of rehabilitation proceedings. Section 100.03 sets out the procedures for doing so and considers venue, jurisdiction and the parties to such proceedings.  The typical provisions of rehabilitation orders will also be discussed.

Section 100.04 discusses the powers and duties of rehabilitators.  These are derived in part from fundamentally similar state statutes which nonetheless may differ in significant respects.  In addition, the rehabilitation orders typically provide additional detail and specificity for these powers and duties in particular cases.  The section examines the rehabilitator’s powers to initiate and maintain legal actions or proceedings, including the extent to which he or she is bound by existing arbitration and alternative dispute resolution agreements and their law and forum selection provisions.

Section 100.05 examines challenges to the rehabilitator’s determination of claims.  Applicability of the Carpenter no worse than liquidation” standard is considered along with the requirements of due process and procedural considerations.

In Section 100.06, the chapter discusses considerations endemic to rehabilitation plans.  The discussion addresses formulation of a rehabilitation plan, its components, and applicable requirements.  Although most state insurance statutes provide scant guidance or are silent on these matters, IRMA and case law supply some important considerations.  For example, IRMA § 401 suggests some core provisions to be included in rehabilitation orders. Additional sections address the rehabilitator’s powers and duties (§ 402); rehabilitation plans (§ 403); termination of rehabilitation (§ 404); and coordination with guaranty associations (§ 405). However, as of this publication, only two jurisdictions, Utah and Texas, have adopted IRMA.  Its predecessor, the Model Act, was more widely adopted but less robust in its treatment of rehabilitation issues.

Section 100.07 of this chapter considers the effects of rehabilitation efforts. Section 100.08 turns to ending rehabilitation.  Section 100.09 delves into conversion from rehabilitation to liquidation, including the basis, timing, and procedures for such transition.  Section 100.11 reviews certain unique cases, such as managed care organizations and specialized insurers.

As will be seen, there are few firm rules governing rehabilitation specifically, although one principle receives almost universal recognition:  policyholders and creditors should fare no worse under a rehabilitation plan than they would have in a liquidation (see Sections 100.01[1][b] and 100.06[7].)  Beyond that, guidance on the circumstances under which rehabilitation efforts may be pursued in lieu of liquidation, and on the permissible nature and scope of those efforts, will consist of the limited direction provided by applicable statutes, what the receivership court will authorize, and what political and administrative considerations will allow.  However, a growing body of case law provides more direction in the review and analysis of rehabilitation issues.  As set out in § 404 of IRMA, abandonment of rehabilitation and transition to liquidation generally follows a conclusion of futility or risk of greater harm from continued pursuit of rehabilitation.

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Table of Contents

§ 100.01  Purposes of Rehabilitation and Distinguishing It From Other Proceedings

[1]        Rehabilitation Defined

[a]        Rehabilitation Has Distinct Goals and Purposes

[b]        There Are Varying Interpretations and Usages of the Term “Rehabilitation” Across Jurisdictions and in Practice

[2]        Rehabilitation is Distinguishable From Liquidation, Where an Insurer Is Eventually Dissolved

[3]        Rehabilitation Is Distinguishable From the Confidential Process of Supervision, Which Is Often a Precursor to Rehabilitation

[4]        Rehabilitation Is Distinguishable From Conservation, Which Is Often a Precursor to Rehabilitation 

[5]        Rehabilitation Is Distinguishable From Federal Chapter 11 Bankruptcy Proceedings

§ 100.02  Grounds for Rehabilitation

[1]        State Codes Set Forth Statutory Grounds for Commencing Rehabilitation in Each State

[2]        An Insurer’s Financial Condition or Other Attributes Are Sometimes Considered Prior to Commencing Rehabilitation 

§ 100.03  Procedures for Commencement of Rehabilitation Proceedings

[1]        State Codes Typically Address Forum and Venue Determinations for Rehabilitation Proceedings, and Proceedings Focus on a Single Forum for Judicial Economy and Fairness

[2]        Jurisdiction for Rehabilitation Proceedings

[a]        States Usually Have Jurisdiction Over Rehabilitation Proceedings by Virtue of the McCarran-Ferguson Act

[b]        Some Federal Jurisdiction Considerations in Rehabilitation Proceedings

[c]        Rehabilitation Proceedings Have In Rem Jurisdiction Over an Insurer’s Assets

[d]        In Personam Jurisdiction Must Be Established in Rehabilitation Proceedings

[3]        Plaintiff/Movant for Rehabilitation Proceedings

[a]        An Insurance Commissioner Is the Usual Initiator of Rehabilitation Proceedings 

[b]        Some States Allow the Attorney General or Other Parties to Initiate Rehabilitation Proceedings 

[4]        The Defendant/Respondent for Rehabilitation Proceedings Is Typically the Impaired Insurer

[5]        Injunctions and Seizure Orders Are Often Used in Rehabilitation Proceedings to Protect an Insurer’s Assets

[6]        Rehabilitation Orders

[a]        The Insurance Commissioner Is Most Often Appointed Rehabilitator Via the Rehabilitation Order

[b]        Certain Powers Are Traditionally Granted to a Rehabilitator by a Rehabilitation Order

[c]        Certain Duties Are Traditionally Imposed Upon a Rehabilitator by a Rehabilitation Order

§ 100.04  Powers and Duties of Rehabilitator

[1]        Upon Entry of the Receivership Court’s Rehabilitation Order, the Rehabilitator Has Specific Statutory Powers and Duties

[2]        The Rehabilitator Has the Power to Manage the Insurer’s Business

[3]        The Rehabilitator Has the Power to Cancel Insurance Policies and Reinsurance Contracts (With Court Approval), and to Affirm or Reject Executory Contracts and Unexpired Leases

[4]        The Rehabilitator Assumes Control Over the Insolvent Insurer’s Finances

[5]        The Rehabilitator Has the Power to Manage Litigation Affecting the Rehabilitation

[6]        The Rehabilitator Has the Power to Sell the Insurer or Its Business

[7]        The Rehabilitator Has the Power to Initiate and Maintain Legal Actions or Proceedings

[a]        The Rehabilitator Has Standing to Assert Claims on the Company’s Behalf

[b]        The Rehabilitator Is Bound by Arbitration Clauses When Asserting Claims, Unless a State Insurance Statute Expressly Provides Otherwise

[c]        The Rehabilitator Is Bound by Choice of Law Provisions and Forum Selection Clauses When Asserting Claims, Unless a State Insurance Statute Expressly Provides Otherwise

[8]        The Rehabilitator Has Certain Duties to Policyholders

[a]        The Rehabilitator Assumes the Insurer’s Contractual Obligations to Policyholders

[b]        The Rehabilitator Must Give Policyholders Priority Over General Creditors, and May Not Prefer Some Policyholders Over Others

[c]        The Rehabilitator Is Not Required to Provide Policyholders With Notice of All Rehabilitation Proceedings

[d]        The Rehabilitation Must Provide Policyholders With Notice of Change or Cancellation of Policy Coverage

[9]        The Rehabilitator Must Attempt to Minimize Harm to Creditors and Must Treat Ratably the Claims of Creditors of the Same Priority

[10]       The Rehabilitator Must Consider the Interests of the General Public

§ 100.05 Challenging Rehabilitator’s Determination of Claims

[1]        With the Receivership Court’s Approval, a Rehabilitator May Adopt Procedures for the Review and Determination of Claims Against the Delinquent Insurer

[2]        A Rehabilitator Must Provide Claimants With Due Process

[a]        A Rehabilitator Must Provide Claimants With Notice and Opportunity to Be Heard Before Denying the Claimant’s Claim

[b]        A Rehabilitator’s Determination of a Claim Is Subject to Judicial Review

[i]         Failure to Exhaust the Adopted Receivership Appeals Procedure Will Result in the Rejection of the Claim

[ii]         A Claimant May Appeal a Final Judgment by the Receivership Court to the Court Designated by Statute for the Purpose

§ 100.06  The Rehabilitation Plan

[1]        Rehabilitation Is Preferred to Liquidation

[2]        The Rehabilitator Must Prepare and File a Plan

[3]        The Goal of a Rehabilitation Plan Is the Reemergence of a Viable Insurer

[4]        A Rehabilitation Plan Must Include Several Elements, and May Include Others

[5]        The Rehabilitator Is Given Substantial, but Not Unlimited, Deference in Structuring the Plan

[6]        There Are Several Common Potential Major Components of Rehabilitation Plans

[7]        In Distributing Assets, a Rehabilitation Plan Must Comply With Priority Statutes

[8]        Subject to Certain Limitations, a Rehabilitation Plan May Restructure Insurance Policies and Compromise Liabilities to Creditors

[9]        Prior to Implementation, a Rehabilitation Plan Is Subject to Scrutiny by Interested Parties and Approval of the Receivership Court (and, in Some Cases, Regulators)

[a]        In Some Cases, a Rehabilitation Plan Will Require Regulatory Approval

[b]        A Rehabilitation Plan Must Be Approved by the Receivership Court

[i]         Interested Parties Should Be Provided Notice and An Opportunity to Be Heard Regarding the Rehabilitation Plan

[ii]         Necessary Parties

[iii]        The Receivership Court May Approve, Disapprove, or Modify a Rehabilitation Plan

[iv]        The Receivership Court’s Approval, Disapproval, or Modification of a Rehabilitation Plan Is Subject to Appeal

§ 100.07  Effects of Rehabilitation Efforts

[1]        If Rehabilitation Is Successful, the Insurer Is Returned to Its Owners

[2]        Rehabilitation May Result in the Compromise of Creditor Claims

[3]        Rehabilitation May Result in Restructuring of Policies, Changes in Claims Handling Procedures, Delayed and Reduced Payment of Claims, and for Life Insurance Policies, the Imposition of Liens or a Moratorium

[4]        The Rehabilitator May Discharge Employees Whose Services Are No Longer Needed, and May Offer Reasonable Compensation to Retain Key Employees

[5]        Rehabilitation Efforts Do Not Typically Involve Guaranty Associations

§ 100.08  Ending Rehabilitation

[1]        Rehabilitation Is Concluded When Either the Conditions of Delinquency Are Resolved or When Continuing the Rehabilitation Would Be Futile

[2]        A Rehabilitation May Only Be Legally Concluded Upon Approval by the Rehabilitation Court and, if Necessary, Relevant Regulatory Authorities

[a]        Approval Must Be Sought From a Court

[b]        Depending Upon the Outcome of the Rehabilitation, Regulatory Approval May Also Be Required

[3]        The Conclusion of a Rehabilitation Has Multiple Effects Upon All Parties Involved

[a]        The Insurer’s Business Operations Will Have Been Fundamentally Altered by the Rehabilitation Plan

[b]        The Conclusion of the Rehabilitation Process May or May Not Resolve Pending Actions

[c]        Policyholders Are Likely to Have Their Policies Changed as Provided by the Rehabilitation Plan

[d]        Interested Parties Remain Entitled to Judicial Review

§ 100.09            Rehabilitation Proceedings Are Converted to Liquidation Proceedings in Certain Circumstances

[1]        There Are Three Substantive Grounds on Which the Rehabilitator May Apply to the Receivership Court to Convert a Rehabilitation Proceeding to a Liquidation Proceeding

[a]        There Is Often Substantial Overlap Among Them

[b]        The Rehabilitator May Apply to Convert the Proceeding to a Liquidation if Interested Parties Would Fare Better as a Result

[c]        The Rehabilitator May Apply to Convert the Proceeding to a Liquidation if He or She Has Reasonable Cause to Believe That Further Rehabilitation Efforts Would Be Futile

[d]        The Rehabilitator May Apply to Convert the Proceeding to a Liquidation if He or She Has Reasonable Cause to Believe That Continued Rehabilitation Efforts Would Substantially Increase the Risk to of Loss to Interested Parties

[2]        The Process of Converting From a Rehabilitation Proceeding to a Liquidation Proceeding

[3]        An Order Converting a Rehabilitation Proceeding to a Liquidation Proceeding Is Subject to Appeal

[4]        Effect and Consequences of Converting a Rehabilitation Proceeding to a Liquidation Proceeding

[a]        Those Who Provide Goods or Services to the Insurer During Rehabilitation Are Typically Unaffected by Conversion to Liquidation

[b]        Some Policyholders Can Benefit From Conversion to a Liquidation Proceeding, to the Extent That Guaranty Coverage Would Apply to Them

[c]        Most Creditors Fare Worse in a Liquidation Than in a Rehabilitation

[d]        Ownership Interests Typically Decline in Value, and Might Be Eliminated Altogether, as the Result of Liquidation


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