Joel Ario, Commissioner of the Pennsylvania Department of Insurance, acting in his capacity as Liquidator of Reliance Insurance Company, initiated this action against Swiss Re and Tribune Company seeking a declaration that Tribune was not entitled to direct access to a series of reinsurance proceeds payable under various agreements between Swiss Re and Reliance. Tribune insured its workers’ compensation risks with Reliance, which was a fronting insurer that reinsured the risks with Swiss Re. When Reliance was declared insolvent, the issue arose as to whether Reliance’s reinsurance with Swiss Re was an asset of Reliance’s estate, or whether Tribune could gain direct access to the reinsurance proceeds. Generally, reinsurance is an important asset of the estate of the insolvent reinsured. However, if the reinsured does not take significant risks as an insurer, instead merely passing through the risks to the reinsurer, the ultimate insured may obtain direct access to the reinsurance proceeds.
The relationships were structured through two written agreements, which received different treatment by the court. The referee appointed to resolve the dispute concluded that Tribune was not entitled to direct access to the reinsurance proceeds under a Gross Compensation Program (GCP) agreement, but was entitled to direct access to proceeds under a Loss Portfolio Transfer (LPT) agreement. Both the Liquidator and Tribune filed objections. The Commonwealth Court of Pennsylvania sustained the findings of the Referee, concluding that: (1) Tribune was not entitled to direct access to the proceeds payable by Swiss Re to Reliance under the GCP because the Gross Compensation Program was not a true reinsurance arrangement, but rather, was more akin to traditional insurance; and (2) Tribune was, however, entitled to direct access to payments under the LPT because the evidence established that Reliance was a fronting company, and therefore the LPT was not an asset of the Reliance Estate. Ario v. Swiss Reinsurance America Corp. and Tribune Co., NO. 860 M.D. 2003 (Pa. Commw. Ct., Dec. 21, 2007).
This post written by Lynn Hawkins.