Reorganization and Liquidation

PROGRESS IN DODD-FRANK IMPLEMENTATION

November 8, 2011 by Carlton Fields

A number of activities of potential significance have occurred in the implementation of the Dodd-Frank Act:

Surplus Lines Regulation:

The Kentucky Insurance Commissioner has proposed a compromise position which would result in the merger of the NAIC sponsored NIMA and the NCOIL sponsored SLIMPACT interstate compacts into a single agreement for the regulation of surplus lines insurance. Many questions remain, including whether such a compromise will be agreed to by the two competing groups, whether the new entity would regulate anything other than premium taxes, and whether the states with the greatest percentage of surplus lines premium tax collections will join such a compact and voluntarily give up a substantial part of their tax revenues.

Systemic Regulation of Companies:

The Financial Stability Oversight Council has a final rule exposed for comment addressing the factors and process for the designation of certain non-bank financial companies for supervision and prudential regulation by the Federal Reserve. It proposes a three step process, with all companies with total consolidated assets of more than $50 billion which satisfy one or more of five financial ratios or thresholds satisfying the first step of the process, with no exemption for any industry or type of company.

The Federal Reserve and the FDIC have approved a final rule requiring that bank and non-bank financial companies which will be subject to its prudential regulation under Dodd-Frank prepare and submit a “resolution plan,” i.e., liquidation plan, as required by Dodd-Frank.

Liquidation of Insurance Companies:

The NAIC is considering for final approval guidelines for state insurance departments designed to assist departments prepare for the implementation of the receivership provisions of Dodd-Frank as they may apply to insurance companies. Although insurance companies would be liquidated pursuant to applicable state law, the timing of the initiation of a liquidation and certain administrative aspects of a liquidation would occur pursuant to the provisions of Dodd-Frank, and would occur much faster than in liquidations conducted strictly under existing state laws.

Insurance Regulation Modernization:

Dodd-Frank requires that the Federal Insurance Office (“FIO”) submit a report to Congress on how to “modernize” and improve the regulation of insurance in the United States, and the FIO has issued a request for comments on that topic. Although the FIO’s Director has testified that his office is not an insurance “regulator” or “supervisor,” the prospect of such a report may cause unease among some advocates of the state regulation of insurance.

This post written by Rollie Goss.

BANKRUPTCY COURT PARTIALLY GRANTS OBJECTIONS ARISING OUT OF CAPTIVE REINSURANCE PROGRAM

November 2, 2011 by Carlton Fields

Frontier Insurance, in rehabilitation, filed proofs of claim following the Chapter 11 bankruptcy of Black, Davis & Shue Agency. The claims related to captive reinsurance program with Frontier. In turn, Westport Insurance, which had issued a professional liability insurance policy to BDS, objected to Frontier’s claims, asserting affirmative defenses and counterclaims. Frontier moved to dismiss those objections, or in the alternative, for a stay pending a ruling on BDS’s own objections to Frontier’s claims. The court found that Westport had standing to object to Frontier’s claims and was not precluded from doing so merely because its interest were adverse to BDS’s. Furthermore, it was premature to dismiss Westport’s objections, and the court reserved the issue for trial. However, the court ruled that amendments to Frontier’s claims to include interest under New York law and to plead negligence were proper. Accordingly, the motion to dismiss Westport’s objections altogether was granted in part, and denied in part. In re Black, Davis & Shue Agency, Inc., No. 06-00051 (USDC Bankr. M.D. Pa. Sept. 29, 2011).

This post written by John Black.

COURT DENIES PRE-PLEADING SECURITY AND DISMISSES SURETY CASE BASED ON STAY IN REHABILITATION PROCEEDING

October 24, 2011 by Carlton Fields

General Security National Insurance Company brought an action in New York federal court against Aequicap Insurance Company, in connection with Aequicap’s alleged failure to perform under a surety bond it issued to General Security. After Aequicap filed an answer in the case, General Security filed a motion seeking to compel Aequicap to post security pursuant to New York’s pre-pleading security statute. Aequicap objected on various bases, including the fact that, after the filing of General Security’s motion, a stay had been entered in Aequicap’s Florida rehabilitation proceeding. The New York court denied General Security’s motion, citing the Florida court’s stay Order, and dismissed the case without prejudice to re-filing, pending the outcome of the Florida proceeding. General Security Nat’l Ins. Co. v. Aequicap Ins. Co., No. 10-9685 (USDC S.D.N.Y. April 29, 2011).

This post written by John Pitblado.

AMICO DISPUTES CASH HOLDINGS IN MANHATTAN RE REHABILITATION

October 17, 2011 by Carlton Fields

In response to a rehabilitation plan for Delaware insurance company Manhattan Re proposed by its receiver, American Motorists Insurance Company (a reinsurer of Manhattan Re) filed objections with the Delaware Court of Chancery. AMICO argued that the plan should be rejected because the receiver improperly intended to dispose of certain cash holdings that AMICO claimed constituted cash collateral under its reinsurance agreements with the company. Additionally, AMICO moved to have the parties’ dispute referred to arbitration, and for a preliminary injunction to preserve the disputed cash until arbitration is resolved. The court found that Delaware law permits enforcement of the arbitration clause in the reinsurance agreement which compelled the parties to arbitrate their dispute over the cash. Additionally, the court issued a partial stay of the proceedings pending resolution of the arbitration. In re Rehabilitation of Manhattan Reinsurance Co., No. 2844 (Del. Ct. Ch. Oct. 4, 2011).

This post written by John Black.

REINSURER PRECLUDED FROM INTERPOSING EARLY DEFENSES IN LIQUIDATION CLAIMS PROCESS

September 14, 2011 by Carlton Fields

Everest Reinsurance Company intervened in the liquidation proceedings of Midland Insurance Company, and moved to have the anti-suit injunction vacated, in order to allow it to participate in the claims settlement process, and to interpose defenses. The trial court denied the motion, and Everest appealed. The appellate court affirmed, finding Everest’s defenses were premature, as none of the relevant claims had yet been approved, and because adequate procedures existed for it to interpose defenses later in the process. It further found that Everest’s ability to challenge the liquidator’s claims decisions was limited by the “follow the fortunes” language in its reinsurance policies. Everest also appealed the trial court’s decision denying its motion for an order precluding the liquidator and Midland policyholders from introducing evidence of settlements entered into by Everest as a direct insurer in other proceedings. The court, however, affirmed that ruling as well, noting such evidence might be relevant insofar as it demonstrated that Everest utilized claims handling methodologies that it seeks to challenge in the Midland proceeding. In re Liquidation of Midland Insurance Co., No. 41294/86 (N.Y. App. Aug. 25, 2011).

This post written by John Pitblado.