The National Association of Insurance Commissioners has givenpreliminary approval to an amendment to the receivership model actopposed by the insurance industry for its purported bias againstguaranty funds.

The Receivership and Insolvency Task Force approved theso-called “Delaware Amendment” to the Insurance Receivership ModelAct dealing with who should receive employer reimbursements fromlarge deductible policies.

Task Force action came at the NAIC winter meeting this week inSan Antonio, Texas. The proposal the group adopted would treat lossreimbursements as assets of the liquidated company, as opposed tothe guaranty fund, which paid the claims.

The insurance industry fought vigorously without success for theso-called “Arkansas Amendment” that favored the guaranty funds.

Ken Stoller, American Insurance Association senior counsel, saidthat it made sense that guaranty fund should be paid, “particularlysince the guaranty fund's payment is what triggered the subsequentreimbursement.”

Failure to properly provide the guaranty fund with thepolicyholder reimbursement would mean the guaranty funds would needto raise additional funds through increased insurer assessments.“Ultimately, such increased assessments would be borne byindividual policyholders,” Mr. Stoller said.

Advocates of the Delaware proposal argue that the term “largedeductible” is actually a misnomer since the policies in questionprovide first dollar coverage with a right of reimbursementlater.

Treating loss reimbursements as assets of the estate isconsistent with the broad body of bankruptcy and insolvency lawthat recognizes an insolvency estate has the same property interestin a debtor's assets that the debtor had immediately prior thestart of insolvency proceeding, they contend.

Under the plan guaranty funds would provided with “early access”to the reimbursement funds.

But Mr. Stoller said the guaranty funds needed immediate paymentwithout the “strings attached” of the early access procedure.

He also noted that five states – Pennsylvania, Illinois,California, Texas and Michigan – have adopted laws embracing theArkansas approach.

“The real battle will be in the state legislatures,” he said.“And there in all the states that have looked at this issue haveadopted the Arkansas approach.”

The proposal now sits with the Financial Condition Committee andwill ultimately face approval by the full NAIC body.