GRID FAQs
Receivership actions include three different types of
judicial proceedings-conservation, rehabilitation, and liquidation-which may be
ordered by the Court to resolve problems with insurance companies not in
compliance with state financial statutes.
The state's chief insurance regulator petitions the Court for the appropriate
form of receivership.
Receivership proceedings are
usually commenced against insolvent or financially impaired insurers in the
insurer's domiciliary state (the state in which the insurer is incorporated)
and in specific courts within that state. Each state requires that the chief
insurance regulator of the insurer's domiciliary state be appointed receiver of
the insurer to administer the receivership under court supervision.
An insurance company insolvency occurs when the statutory
liabilities exceed its statutory assets, or when an insurance company is unable
to pay its debts as they become due in the usual course of business.
In some states, a court may
enter an order of conservation upon the petition of a regulator. An order of
conservation is designed to safeguard the assets of the insurance company and
give the regulator an opportunity to determine the course of action that should
be taken with respect to the insurer. In some states a court ordered
conservation may be confidential.
The chief insurance
regulator may petition a state court for an order of rehabilitation as a
mechanism to remedy an insurer's problems, to protect its assets, to run off
its liabilities to avoid liquidation, or to prepare the insurer for
liquidation.
grounds
The
grounds upon which a regulator may petition the court for an order of
rehabilitation vary from state to state. The regulator must allege and prove a
specific statutory ground that indicates that rehabilitation of the insurer is
warranted.
A
rehabilitation proceeding is a formal court proceeding, commencing with an
allegation by the insurance regulator that the insurer is financially impaired,
insolvent or meets another statutory ground for rehabilitation. The insurer is
served with a summons. The insurer may respond and must be afforded an
opportunity to be heard. When judgment is entered, the losing party may appeal.
contents of
a Rehabilitation Order
An
order of rehabilitation appoints the regulator as rehabilitator and directs the
rehabilitator to take control of the insurer's assets and administer them under
general court supervision. The rehabilitation order may provide the
rehabilitator with title to all of the insurer's assets, books, records,
accounts, property and premises, and generally includes an injunction against
pending and threatened litigation. The order is typically filed with the court
clerk or recorder of deeds so that creditors and the public are put on notice
of the rehabilitation.
The
rehabilitation order may require that the rehabilitator file reports and
accountings with the court.
The
rehabilitator usually has the power to act as necessary or appropriate to
reform and revitalize the insurer. The rehabilitation order usually suspends
the powers of the directors, officers and managers except as the rehabilitator
delegates. The rehabilitator usually retains all powers not delegated.
The
receiver is charged with implementing the restrictions, limitations and
requirements set forth in the order of rehabilitation. The order may prohibit
the insurer from writing new business or may severely limit the amount and type
of new business written. Similarly, the order may impose significant
restrictions or prohibit the renewal of business when the renewal is at the
option of the insurer. The order may also require the insurer to modify or even
cancel certain managing general agency, Third Party Administrator and general
agency agreements. The order may suspend claims payments and halt the transfer
of cash or loan values on life insurance contracts.
the
Rehabilitation Plan
In
most cases the rehabilitator will attempt to formulate a plan to rehabilitate
the troubled insurer. If the rehabilitator determines that reorganization,
consolidation, conversion, reinsurance, merger or some other transformation is
appropriate, then the rehabilitator typically prepares
a plan to effect the necessary change(s). The plan of rehabilitation should be
in the best interests of the policyholders, creditors and the insurer itself.
After formulating the plan, the rehabilitator generally must submit it to the
supervising court for approval. The court will then either
approve, disapprove or modify the plan. State law typically requires
that the court give notice and hold hearings upon any proposed plan. The
rehabilitator must implement the plan's approved terms.
Similarly,
the receiver should be prepared to liquidate the insurer if rehabilitation is
not feasible or practical. The receiver should organize the assets, books and
records of the insurer to ensure an orderly transition to liquidation.
Terminating the rehabilitation
If
the receiver determines that the causes and conditions which made the
rehabilitation proceedings necessary have been removed, he or she may apply to
the court for an order terminating the rehabilitation.
Alternatively,
the time may come when the receiver determines that further attempts at
rehabilitation would substantially increase the risk of loss to policyholders,
creditors, or the public. At that time, a petition for liquidation is
appropriate.
The regulator may petition
the court for an order of liquidation when any of the grounds set forth in
state statutes exist. In liquidation, the receiver/liquidator must identify
creditors and marshal and distribute assets in accordance with statutory priorities
and dissolve the insurer. In most states, the insurer must be insolvent to be
placed in liquidation.
Once
a petition for liquidation is filed, the company will have an opportunity to
defend itself, which can result in a trial or an evidentiary hearing. If the
court determines that the regulator has sufficiently established any of the
statutory grounds for liquidation, it should enter an order of liquidation,
appointing the regulator as the liquidator of the insurer and vesting the liquidator
with title to all of the insurer's assets and records. The order enables the
liquidator to control all aspects of the insurer's operations under the general
supervision of the court. Orders of liquidation may be appealed by management
and/or shareholders of the insurer.
Statutes
in most states provide that upon issuance of the order, all of the rights and
liabilities of the insurer, its creditors and policyholders are fixed as of the
date of entry of the order of liquidation. State statutes may describe the
effect of the order of liquidation upon contracts of the insolvent insurer.
Upon
entry of the order of liquidation, the receiver is charged with the duty to
secure, marshal and distribute the assets of the estate. The power to perform
these duties is provided by the order of liquidation and the state receivership
statutes. It is important for the order of liquidation to include certain other
items, which should be determined by applicable provisions of the law in the
state of domicile of the insurer. These items typically include the appointment
of the liquidator; list the powers of the liquidator as provided by state
statute; provide for the immediate delivery of all books, records and assets of
the insurer to the liquidator; injunctions prohibiting other parties from
proceeding with actions against the liquidator, the insurer or policyholders;
and may provide for notice to policyholders and cancellation of policies. If it
is appropriate to trigger the guaranty associations, it is necessary for the
order of liquidation to include a finding of insolvency for property and
casualty guaranty associations and may be necessary in certain states for life
and health guaranty associations.
Effect on Policies
In
general, the courts enforce the statutes that provide for the cancellation of
insurance policies upon liquidation. Courts have held that the order of
liquidation effectively cancels outstanding policies and fixes the date for
ascertaining debts and claims against the insolvent insurer. However, the
insolvency of a life insurer presents a unique situation. The NAIC Model Acts
provide for the continuation of life, health and annuity policies. Typically,
life and annuity contracts (and, to a lesser extent, health contracts) are
transferred to solvent third party insurers.
deadline
for filing claims
Unless
established by statute, the court establishes a deadline for the filing of
claims against the assets of the insolvent insurer.
State guaranty associations are statutorily created entities (in all 50 states as well as Puerto Rico and the District of Columbia) created to protect policyholders of an insolvent insurance company. All insurance companies licensed to sell property and casualty, life and health, and workers' compensation insurance coverage in a state must be members of that state's applicable guaranty associations.
Once the liquidation is ordered, the guaranty association provides coverage to the company's policyholders who are state residents (up to the limits specified by state laws). For a complete listing of each state's laws regarding this coverage, see: