Battle Looms Over Reliance High-Deductible Policies Philadelphia has been a venue for many epic struggles, from the American Revolution to Rocky I. But the battles spawned by the Reliance liquidation promise to be among the most memorable in the insurance world, and the lengthiest.

Guaranty funds of 25 states have filed a lawsuit against Pennsylvania Insurance Commissioner Diane Koken in her capacity as liquidator of the Reliance estate, claiming that the funds are entitled to reimbursement of amounts that Reliance could have collected from policyholders that purchased high-deductible policies.

On the same day, the commissioner sued eight guaranty funds, contending that the deductible money should be distributed as any other asset of the Reliance estate. The Pennsylvania Insurance Department asserts that the date-stamp on its pleading proves that it preceded the funds through the courthouse door.

The reason for the discrepancy in the number of guaranty funds involved in the two lawsuits is unclear at this point. The commissioner's pleadings call the eight funds “representative,” and indicate that more may be added.

“The guaranty funds stepped into the shoes of Reliance and are therefore entitled to what Reliance could have collected under these high-deductible policies,” said Michael Browne, a partner with Reed Smith LLP in Philadelphia and attorney for the 25 funds.

Mr. Browne is also a former Pennsylvania insurance commissioner, having served in that post during the relatively tranquil years of 1980 to 1983.

“Reliance had about 1,400 of these high-deductible policies,” Mr. Browne noted, “under which the first $100,000, or $500,000, or whatever the deductible happened to be, was the obligation of the policyholder.” The policyholder would either absorb the deductible amount or reimburse Reliance for the deductible if Reliance paid it, Mr. Browne added.

According to Commissioner Koken's pleadings, most of the high-deductible policies were for workers' compensation, although there were some for general liability and automobile liability as well.

“The insurance commissioner is saying you [the guaranty funds] pay the claims, and we'll keep the deductibles,” Mr. Browne continued. This did not sit well with the funds, given that “potentially hundreds of millions of dollars” are at stake, as noted in pleadings filed in the case by the funds.

Mr. Browne stressed that the guaranty funds will need every dollar they can muster, considering they have already paid $875 million in connection with the Reliance liquidation and may be called upon to pay about $1 billion more. According to the funds' pleadings, Reliance holds about $1.4 billion in collateral for the high-deductible policies.

Commissioner Koken's side of the story is that, as liquidator, she has a duty to use the Reliance assets for the benefit of all policyholders, and not only those whose claims are covered by guaranty funds.

“Current estimates show that there could be up to $2 billion of claims not picked up by the guaranty funds,” noted Pennsylvania Insurance Department spokesperson Melissa Fox.

“That's about 50 to 70 percent of the Reliance policyholder claims,” Ms. Fox added. “That would leave 30 to 50 percent without access to anything but the assets of the Reliance estate, which explains our continuing efforts to marshal assets to pay policyholder claims.”

Policyholders without guaranty fund access include those in ineligible coverage lines such as ocean marine, fidelity and surety, mortgage guaranty, and title insurance, according to Ms. Fox. “In addition, policyholders in 'overcap' situations–with catastrophic claims that exceed the amount that guaranty funds are allowed by law to pay–need to be protected.”

She also pointed out that policyholders with coverage placed through Reliance's non-admitted carrier would not have their claims paid by the guaranty funds.

These arguments did not seem to faze Mr. Browne, who accused the commissioner of attempting to “rewrite the laws” governing guaranty funds.

“The policyholders that the commissioner seeks to protect are for the most part large corporations with over $25 million in net worth,” Mr. Browne said. “Guaranty funds were set up to be safety nets. They were not intended to subsidize ineligible policyholders.”

Reproduced from National Underwriter Edition, July 14, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.

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Battle Looms Over Reliance High-Deductible Policies

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