Integrity Insurance Company, which among other risks insured environmental and products liability risks with long claim tails that were subject to reinsurance, was declared insolvent. The issue arose as to whether the IBNR claims for such risks could participate in the liquidation plan, which would mean that the liquidator could collect on such claims from Integrity’s reinsurers immediately. The applicable New Jersey statute provides that only “absolute” claims may participate in a liquidation plan. The liquidation court held that IBNR claims could participate in the liquidation plan, but the Court of Appeals reversed (reported on in an October 11, 2006 post to this blog). The New Jersey Supreme Court held that since IBNR claims are actuarial estimates, they are not “absolute” as of the claim bar date, and therefore cannot participate in the liquidation plan. The holding turned on the interpretation of “absolute,” which the Court held required that the claims be capable of being determined on their own merit, standing on their own, independent of any other claim. Since IBNR claims are estimated in part based upon the insurer’s historical experience, they did not qualify as being “absolute.” It had been estimated that allowing IBNR claims, instead of requiring that they be considered in a run-off mode, would have saved $45 million in administrative expense. This principle could have a significant effect upon the duration of liquidation proceedings, their expense and the amount and timing of funds available from reinsurance to fund liquidation plans. In re Liquidation of Integrity Insurance Company, A-29 (December 13, 2007).
This post written by Rollie Goss.